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University of Pcs Faculty of Business and Economics MBA Program

Financial Models for IMS Based Services

MBA Thesis

Author: Bela Varkonyi

Thesis Supervisor: Zsolt Bedo Assistant lecturer

Pcs, 2007.

University of Pcs Faculty of Business and Economics MBA Program

Contents
1 2 Introduction...............................................................................................................1 Business Impact of IMS Services .............................................................................2 2.1 IMS Overview................................................................................................... 2 2.1.1 Mobile 3G Technologies........................................................................... 2 2.1.2 IP Multimedia Subsystem History............................................................ 4 2.1.3 Next-Generation Networks ....................................................................... 6 2.1.4 Convergent Networks ............................................................................... 7 2.1.5 Next-Generation Operation Support Systems........................................... 9 2.1.6 Next-Generation Business Support Systems .......................................... 10 2.2 New Business Models in Telecommunications .............................................. 12 2.2.1 IMS Value Chain .................................................................................... 12 2.2.2 Technology Inno vation Impact ............................................................... 13 2.2.3 Structural Changes .................................................................................. 14 2.2.4 Customer Models .................................................................................... 16 2.2.5 Supplier Models ...................................................................................... 18 3 Existing Financial Models in Service Management ...............................................21 3.1 Financial Control of Service Development ..................................................... 21 3.1.1 Business Development Planning............................................................. 21 3.1.2 Service Development Planning............................................................... 23 3.1.3 Investment Business Case ....................................................................... 25 3.1.4 Investment Decisions .............................................................................. 28 3.1.5 Project Controlling .................................................................................. 30 3.2 Financial Control of Service Operations ......................................................... 31 3.2.1 Revenue Monitoring ............................................................................... 31 3.2.2 Cost Monitoring ...................................................................................... 32 3.2.3 Benchmarking ......................................................................................... 34 3.2.4 Profitability Analysis .............................................................................. 35 3.2.5 Service Termination Decision................................................................. 35 3.3 Existing Modeling Tools................................................................................. 36 3.3.1 Excel Worksheets.................................................................................... 36 3.3.2 Modeling Software.................................................................................. 36 3.3.3 Business Intelligence Applications ......................................................... 37 4 Financial Models for IMS Services ........................................................................38 4.1 Business Model............................................................................................... 38 4.1.1 Revenue Structures ................................................................................. 39 4.1.2 Cost Structures ........................................................................................ 39 4.1.3 Cost Dependencies .................................................................................. 40 4.1.4 Key Performance Indicators.................................................................... 41 4.1.5 Time scales.............................................................................................. 41 4.2 Investment Decision Models........................................................................... 42 4.2.1 Overview of Evaluation Methods ........................................................... 42 4.2.2 Discounted Free Cash-Flow.................................................................... 44 4.2.3 Economic Value Added .......................................................................... 47 4.2.4 Cost-Benefit Analysis ............................................................................. 48

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4.2.5 Real Options Analysis .............................................................................49 4.2.6 Scenarios .................................................................................................51 4.3 CAPEX Planning.............................................................................................51 4.3.1 Project Portfolio Management ................................................................51 4.3.2 Periodic Reviews .....................................................................................52 4.3.3 Procurement Controls..............................................................................53 4.3.4 Savings Campaigns .................................................................................54 4.4 OPEX Planning ...............................................................................................54 4.4.1 Service Portfolio Management ................................................................54 4.4.2 Enforcing Savings ...................................................................................54 4.5 Investment Performance Evaluation ...............................................................55 4.5.1 Financial Profit-and- Loss Analysis .........................................................55 4.5.2 Economic Value Added Calculations .....................................................55 4.5.3 Application of Benchmarking .................................................................56 4.6 Proposed Modeling Tools ...............................................................................57 4.6.1 Available Modeling Tools.......................................................................57 4.6.2 Excel Workbook Requirements ..............................................................57 4.6.3 Software Technology Requirements .......................................................59 4.6.4 Reference Implementation ......................................................................60 4.6.5 Modeling workflow.................................................................................60 Application of Financial Models for IMS Services ............................................... 63 5.1 General Templates for IMS Services ..............................................................63 5.2 Video sharing ..................................................................................................63 5.3 Presence and network address book ................................................................64 5.4 Instant messaging ............................................................................................65 5.5 Push-to-talk .....................................................................................................68 5.6 Presence based IP telephony (voice and video) ..............................................71 5.7 Mashup services ..............................................................................................72 Summary ................................................................................................................ 73 6.1 Current Practice in IMS Financial Modeling ..................................................73 6.2 Proposed Financial Modeling Solution...........................................................74 6.3 Further Study...................................................................................................75 References ................................................................................................................. I Appendices............................................................................................................... 1 8.1 Implemented Financial Models .........................................................................1 8.2 Users Guide.......................................................................................................3 8.2.1 Workbook structure ...................................................................................3 8.2.2 Naming conventions ..................................................................................4 8.2.3 Color coding and other visuals..................................................................5 8.2.4 File linking ................................................................................................6 8.2.5 Self-audit tools ..........................................................................................6 8.2.6 Exception handling....................................................................................7 8.3 Content of the Attached CD..............................................................................8

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List of Figures
Figure 2-1. Power efficiency of VoIP ............................................................................... 4 Figure 2-2. Uptake of IMS Services ................................................................................. 5 Figure 2-3. Simplified view of Common IMS .................................................................. 7 Figure 2-4. New IMS value chain................................................................................... 12 Figure 2-5. Service architecture evolution...................................................................... 14 Figure 2-6. New revenue and cost charateristics in IMS ................................................ 15 Figure 2-7. Value-based pricing opportunities ............................................................... 16 Figure 4-1. Arvetica business model framework ............................................................ 38 Figure 4-2. Arvetica BMF example: Skype .................................................................... 39 Figure 4-3. Modeling workflow overview ...................................................................... 62 Figure 5-1. Video sharing architecture ........................................................................... 64 Figure 5-2. Presence architecture.................................................................................... 65 Figure 5-3. IMS PIM architecture (SIMPLE) ................................................................. 66 Figure 5-4. IM client enabled handsets forecast ............................................................. 68 Figure 5-5. IMS OMA PoC architecture......................................................................... 69 Figure 5-6. Push-to-anything roadmap forecast.............................................................. 70 Figure 5-7. IMS presence based telephony architecture ................................................. 72

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1 Introduction
In the last few years a new major trend has been emerged in the mobile telecommunications sector: the preparation for the introduction of IP Multimedia Subsystem (IMS) based services. One of the biggest issues is to find the proper scheduling of such service deployments and commercial rollouts. After the service introduction a strict financial control is needed to achieve the established business goals. All these activities shall be based on a reliable financial modeling framework. There are also regulatory requirements that necessitate the use of detailed financial models for IMS services. The Sarbanes-Oxley (SOX) law or similar corporate governance legislation are applicable to most big telecommunications companies and mandate the top management to take personal responsibility for the transparent operations of the company. It is also important to document the costs behind product prices, since most of these enterprises were monopolies in the recent past, so they are heavily regulated by the national and international telecommunications authorities. As a consequence, investment decisions and service performance shall be documented not just to satisfy the controlling needs of the company owner, but also to support the compliance to the various regulations.

In this study we will make an overview of business process and financial control frameworks used at mobile operators. Based on this overview we will determine the detailed requirements for the financial modeling of IMS services. Then we will analyze the possible methods for this modeling, and finally we will propose a recommended solution. The selected models will be implemented using spreadsheets and we will show some examples how these models could be used in the lifecycle management of IMS services. The following main financial model categories will be investigated: Future return on investment for service introduction decisions Service revenue forecasting Annual CAPEX planning Annual OPEX planning Activity based costing for common infrastructure and support environment Opportunity costs Financial Models for IMS Based Services 1

Bela Varkonyi

University of Pcs Faculty of Business and Economics MBA Program

Cost savings Total cost of ownership forecasting Total cost of ownership historical analysis Service revenue synergies, dependencies, corrections Total service revenue measurement Analysis of historical return on investment for performance evaluation Financial value of existing IMS infrastructure, support environment, and service capabilities Financial risk management

In this study we will analyze the following IMS based services: Video sharing Presence Instant messaging Push-to-talk Presence based IP telephony (voice and video)

The scope of the study is limited to propose solutions for those issues that are really relevant to IMS services. As this is a new technology and quite complex in its details, most controlling departments are not ready to handle the special aspects of IMS services. In this study we will focus on those tasks only that could be assigned to technology departments, and in some way to marketing and business development departments. We will intentionally not deal with such items as financing decisions, deriving calculative rates, managing financial risks, etc. This is left to the financial departments and follows well established practices that would not change by the introduction of IMS services.

2 Business Impact of IMS Services


2.1 IMS Overview
2.1.1 Mobile 3G Technologies
[3G Americas 2006] summarizes the trends in mobile 3G technologies putting the emphasis on quick uptake in HSPA technologies (HSDPA and HSUPA) creFinancial Models for IMS Based Services 2 Bela Varkonyi

University of Pcs Faculty of Business and Economics MBA Program

ating a true wireless broadband experience comparable to ADSL. Recently the revenue contribution of data services jumped over 20% and may reach up to 50% in some cases because these higher speeds attract a lot more customers then the previous GRPS and EDGE solutions capable only to provide ISDN speeds. The higher speeds of HSPA enable real multimedia applications while the lower speeds of GPRS and first generation UMTS were not really adequate for video content. One way video download streaming became quite popular in various types of mobile TV offerings, but only HSDPA provides enough bandwidth that matches the user expectations. UMTS video services proved to be a big failure, especially the circuit-switched video telephony. Packet-switched solutions would not help on the problem, since in 1st generation UMTS the maximum uplink speed is 64 Kbit/s, the same as with circuit-switched video. Even with HSDPA the uplink is maximum 384 Kbit/s that is just the same as legacy ISDN video conferencing. Only with HSUPA it becomes possible to make good quality peer-to-peer video streams. HSUPA will become a general commercial service in Hungary only by the end of 2007. In classical mobile telephony voice services are provided by circuit-switched (CS) technology, while data services are provided by packet-switched (PS) techno logy. The major difference is that statistical multiplexing might result in better resource utilization in the packet-switched domain. Without getting lost in technical details we have to note that CS and PS approaches might be combined in the multiple overlays in a complete networking solution. However, based on the economics of larger scales and tighter competition the clear winner is the IP protocol and classical TDM and recent ATM technologies are being phased out. Replacing old CS telephone exchanges requires new IP based softswitches. Here the dominant protocol is SIP, and IMS is also based on the extension of the more than decade old SIP standards. Rysavy and 3G Americas 2007) emphasizes that HSPA is the enabler technology for the migration to IP based mobile solutions. It has enough capacity to support multiple custome rs in a cell to use VoIP services. As [3G Americas 2007] explains without the higher uplink capacity of HSUPA large scale VoIP over cellular services would not work. The statistical multiplexing nature of IP traffic leads to interesting consequences. In [Figure 2-1] we can illustrate that the power utilization improves by migrating to VoIP and thus improving cost effectiveness. Another typ iBela Varkonyi 3 Financial Models for IMS Based Services

University of Pcs Faculty of Business and Economics MBA Program

cal example for potential cost savings is mentioned in [3G Americas 2007] when introducing HPSA+ proposals for the one-tunnel architecture. The current RNC and Node B might be merged together, and the SGSN can be reduced to control plane functions. User plane resource will be handled only by the GGSN and the NodeB. Figure 2-1. Power efficiency of VoIP

Source: [Rysavy and 3G Americas 2007]

In the next few years UMTS Release 8 development and standardization will show a significant progress as described in [3G Americas 2007]. The core network will become all IP and the Evolved Packet System (EPS) will be even simpler than the HSPA+ One- Tunnel Architecture. The Long-Term Evolution (LTE) radio technology will increase the access speeds into FastEthernet regions, so we could see a user experience similar to todays local area networks.

2.1.2 IP Multimedia Subsystem History


UMTS appeared first in the form of 3GPP Release 99 radio network where the circuit-switched and packet-switched domains are totally separated. 3GPP R elease 5 introduced the so called IP Multimedia Subsystem or IMS. IMS is layered on top of the packet-switched domain. There was a quick progress of newer IMS definitions in Release 6 and Release 7 of UMTS. However, mobile radio networks are still mostly at Release 99 only, and just recently migrating to Release 4. [3G Americas 2006] and [Rysavy and 3G Americas 2007] describe a lot of future enhancements to the mobile radio network, but we have to emphasize again, that these are just on paper and cannot be implemented yet in real life. Financial Models for IMS Based Services 4 Bela Varkonyi

University of Pcs Faculty of Business and Economics MBA Program

In 2004-2005 there were a lot of claims that IMS would quickly replace the aging circuit-switched services. However, classical telecommunications vendors (Ericsson, Nokia Siemens, Alcatel-Lucent, Nortel, Huawei, etc.) were not quick to throw out their investments and most operators were convinced to do an interim step using 3GPP Release 4 network technologies. IMS theoretically opened up the competition by enabling IT and IP networking vendors to break into the telecommunications equipment market. HP, IBM, Cisco Systems, and many smaller companies hoped to benefit from IMS, but up to now most of them failed miserably. The classical telecommunications vendors attacked back by grabbing most of the IMS contracts, so they could control timing and recapture investments in older technologies. To get the contracts they showed how big the potential cost savings are when moving voice services from the CS to the PS domain. Once they realized the big potential competition they cut back in IMS terminal development efforts and lowered the prices of Release 4 equipment significantly to catch most of the advantages in an area where the new competitors could not play. They also slowed down standardization progress (the most notable example is the JSR-281 API). Figure 2-2. Uptake of IMS Services

However, the IMS projects started in 2005-2006 at the dominant operators starts showing some results in the near future [Figure 2-2]. There are some initial commercial IMS services already on the market (Softbank in Japan and AT&T Wireless in the USA). The first IMS technology based services earlier rolled out by TIM, Italy or TMN Portugal, or Telefonica, Spain are not considered as true IMS soluBela Varkonyi 5 Financial Models for IMS Based Services

University of Pcs Faculty of Business and Economics MBA Program

tions, since they are still vertical silos and do not implement the shared infrastructure concept of IMS. According to expert estimates, as soon as good commercial grade IMS terminals will become more available in 2008 a lot of operators will launch IMS services. In mobile networks IMS will be used first for value-added services (VAS) and not for replacing the current voice offerings. Such services might include video sharing, presence and instant messaging, push-to-talk, etc. Classical CS telephony currently provides some quality-of-service guarantees, while the new IMS based PS telephony solutions cannot, since the classical telecommunications vendors intentionally do not implement the necessary modifications in the mobile radio and core networks. This practically blocks the distribution of both IMS and other VoIP competitors such as Skype, GoogleTalk, MSN, Fring, Gizmo, etc. IMS is also not a mature, finished technology. A lot of further development is still needed before it can fully replace older CS solutions. As [3G Americas 2006] reviews it, the major development areas are: fixed broadband access to IMS (FBI), IMS multimedia telephony enabler (MITE), combining CS and IMS (CSI), policy and charging convergence (PCC), and voice call continuity (VCC). That means that a lot of investments will be done into IMS even at operators who already started with IMS. These investments might peak out in 2010-2012 and then slowly degrade once the new build outs are finished. We agree with [3G Americas 2006] that the trans ition to PS only mobile networks, and thus IMS, may end up only in 2017 or even later.

2.1.3 Next-Generation Networks


[Jaffe 2004] identifies the fundamental changes in telecommunications for the beginning of the 21st century stating that carrier-grade VoIP and new service enablers are the same level as the truly revolutionary nanotechnology. These new telecommunications technologies are also called Next-Generation Network or NGN. It was first standardized in the ETSI TISPAN project. The core element of TISPAN NGN is the 3GPP IMS. Some extensions were added to handle the special needs of fixed- line networks. However, in 2007 the NGN standardization efforts were merged between ETSI and 3GPP resulting in the Common IMS concept [Figure 2-3], so from Release 8 of UMTS the two standards will be unified as noted by [3G Americas 2007]. Financial Models for IMS Based Services 6 Bela Varkonyi

University of Pcs Faculty of Business and Economics MBA Program

Figure 2-3. Simplified view of Common IMS

Source: [3G Americas 2007]

One of the biggest issues in classical fixed- line networks is that the customer cannot be identified clearly in classical telephony. The authentication is done by a physical location basis and the same terminal is used by multiple persons (for exa mple a family). In mobile telephony the devices are related to individua ls and the basic assumption is that the device belongs to a well identified person. This is supported by the usage of UICC cards with SIM, USIM, or ISIM modules. The fixed- line NGN might need to keep compatibility with the legacy telephony services, so introducing SIM authentication would be a big problem. These types of cultural differences make it very difficult to fully merge fixed- line and mobile networks. With the new Common IMS approach such differences will be accommodated as dynamically manages options configurable per subscriber or user identity. Another important new proposal is the Next Generation Mobile Network (NGMN). This new mobile technology will provide all the necessary elements that are still not enough good for reaping the full benefits of IMS. Promises include a much better QoS (optimized for IP networks), an efficient always-on support, and seamless mobility [Akhavan et al. 2006]..

2.1.4 Convergent Networks


One of the current telecommunications industry trend is convergence. It is happening in multiple dimensions. On the business level, a lot of fixed operators merged backed its mobile arms. One of the early runners was Telecom Italia, and such major companies followed as France Telecom. Currently Magyar Telekom is Bela Varkonyi 7 Financial Models for IMS Based Services

University of Pcs Faculty of Business and Economics MBA Program

also going through such reorganization. This means that separate mobile and fixedline business unit will cease to exist and new units will be organized around retail and business customer market segments. This business trend is enabled by the convergence of network technologies. All telecommunications services will migrate in the future to IP protocol based solution. The most notable example is the British Telecom 21CN project. The new ne twork changes the vertically separated silos into a horizontally layered unified architecture. At the lowest layers different access technologies will still proliferate, but as move up a common IP network will be used for general network transport. Some argue that operators should stop here and let the services to be offered by thirdparties like Google, Yahoo, Microsoft, etc. The IMS/NGN concept goes against this Internet trend. It supports the survival of the intelligent network model that worked so well for the telecommunications companies for decades. IMS provides a common control plane for a big range of applications in the PS domain. From UMTS Release 8 even CS domain services could be controlled by IMS as foreseen by [3G Americas 2007]. IMS Centralized Services (ICS) will be a big turning point in replacing current network architectures, but it may take another decade to get there. The convergence of the control plane promises a significant reuse of resources and thus potential cost savings. Increased reuse may also help to get faster adaptation to ever changing market cond itions. We may also expect a convergence in security solutions. The UICC card is the clear winner among all kind of security devices if look at the numbers of mobile customers. [3G Americas 2007] summarizes those new features coming in UMTS Release 8 that would make a convergence based on UICC even more likely. The future UICC cards will have gigabytes of memory and near- field contact (NFC) possibilities. The later feature has started to replace credit cards in Japan already and will come even to in Hungary very quickly. On of the biggest problems with authentication and authorization algorithms that we cannot rely on the CPU environment where the software is executed in a general PC environment. The only reliable solution is when the authentication between the network and terminal is done by a hardware protected special device like the UICC where only strictly controlled software could be run. Practically each PC or mobile handset will have minimum two independent CPU environments: one to Financial Models for IMS Based Services 8 Bela Varkonyi

University of Pcs Faculty of Business and Economics MBA Program

run the application and another on the UICC to run the security algorithms. Currently the only technology that can open up the UICC authentication and authorization possibilities in standard way is the IMS. The Advanced IMS proposal brought up in August 2006 is based on this recognition and plans to extend the IMS architecture onto other protocols than the current SIP. IMS is also a way to converge in the standardization sector. Originally 3GPP proposed this solution, but not alone, from the very beginning they relied on cooperated with the Internet Engineering Taskforce (IETF), which specifies key protocols such as SIP. On the other end the Open Mobile Alliance (OMA) specifies end-to-end service- layer applications. The overall IMS architecture and standards are supported by almost all relevant standardization organizations: the GSM Association (GSMA), the ETSI, the CableLabs, the Parlay Group, the ITU, the American National Standards Institute (ANSI), the ETSI Telecoms and Internet converged Services and Protocols for Advanced Networks (TISPAN) program, the Java Community Process (JCP), and many national and regional standardization bodies, too. All really competitive market alternatives (such as Skype) are proprietary and would never be standardized. This is still unclear if these alternatives could kill IMS or not, but more recent traffic data in operator networks show that telecommunications companies have a real chance to kick back and remain competitive with pure Internet based services. But only by reducing costs significantly, changing pricing models and accepting lower EBIDTA margins. In about one decade from now on we can expect that all telecommunications services will be managed on top of a common IMS platform utilizing UICC cards in the terminals and relying on IP as a network transport technology. That means that financial planning of IMS services will be the basic everyday practice for all surviving telecommunications operators.

2.1.5 Next-Generation Operation Support Systems


Convergence is also happening in other important areas of telecommunications activities. The two camps of classical TMN and Internet style SNMP management are coming together under the NGOSS umbrella. The NGOSS project started by the TeleManagement Forum aims to standardize the operation support systems (OSS) to fit into the trend of the NGN (IMS) developments. They propose a common Bela Varkonyi 9 Financial Models for IMS Based Services

University of Pcs Faculty of Business and Economics MBA Program

business process framework, called the eTOM model. It was accepted by ITU-T as a general international standard and various vendors take into account when developing new software versions. Even ERP systems such as SAP follow the eTOM model in their latest releases. On of the big advantages of the eTOM model that it creates a common language with which business and technology people could understand each other and get an agreement on business models and processes. eTOM follows a multidimensional layered architecture based on the value creation chain concept. It clearly defines the differences between resource, services, and products. It gives good guidance for reusing business process experience of the whole industry. Since OSS ve ndors migrate to NGOSS in their new products, those telecommunications companies might get competitive advantage who are able to accommodate the eTOM model in their organization, processes, and information systems. NGOSS also influences business model and financial engineering efforts. It is a good idea to use the international standard terms provided by eTOM in these activities to enable better benchmarking and optimization. However, we should keep in mind, that eTOM is just a reference framework, each company have a lot of possibilities to things differently than the others. If all companies had to be the same, then the competition would not be based on innovation anymore. The eTOM model shall be seen similar to other reference frameworks such as the 7- layer OSI model in ne tworking, the ITIL in information systems management, the CobiT in information systems audit, or the COSO in corporate governance. IMS integration with the OSS is done typically using SNMP or CORBA protocols. Some functions may also use the SOA architecture and its SOAP/HTML implementation. An element management system (EMS) and a network management system (NMS) are also essential functions to have, since the IMS architecture includes a lot of components and quite complex to troubleshoot.

2.1.6 Next-Generation Business Support Systems


Sometimes it is very difficult to make a differentiation between OSS and BSS (Business Support System). In most of literature, in products, and in internal company names the borders are very fuzzy. However, we have to make some distinction to be able to manage the complexity of OSS/BSS solutions and processes. In our Financial Models for IMS Based Services 10 Bela Varkonyi

University of Pcs Faculty of Business and Economics MBA Program

opinion the separation shall be based on the involvement of the customer. If we have something to do with customer related activities such as charging, mediation, rating, billing, provisioning, CRM, then we are in the BSS domain. If the tasks are focusing on the network and services without looking at the individual customers, then we are in the OSS domain. The OSS domain includes element management, network management, performance management, event and fault management, configuration management, etc. ITU-T TMN also adds authentication, authorization, accounting (AAA), and other security management functions to the OSS domain. This could be challenged based on our previous definition, but unfortunately we are not in a position to clean up this mess in the industry. The BSS area is classically very much based on mainly proprietary solutions. Some underlying technologies are standardized, but the high layers not. There are two major business models in billing: post-paid and pre-paid. The pre-paid solution was made popular by the mobile operators, but nowadays it is also available for fixed- line and Internet services. The pre-paid scheme requires on- line charging that puts a much bigger burden on IT systems. This was enabled only by recent advances in IT technologies. Off- line charging is less performance demanding, since here the mediation, rating, and billing processes are detached from the customer servicing by the network. Maintaining these two separate billing and charging architectures could increase the costs significantly. With the progress in IT systems performance in recent years new convergent billing solutions ha ve emerged. In these systems a single online charging technology is used, where off- line charging is used for reconciliation. Convergent billing makes it possible to put usage limits unto specific service by postpaid subscribers. There is also a convergence on the pricing scheme level by introducing service packages or bundles. A characteristic example is the T-Mobile Relax tariff where practically the post-paid subscriber buys a pre-paid service package. It is also common to have usable minutes included in the monthly subscription fees. Although these business models do not necessarily require a convergent billing technology, it is of course more efficient to implement the IT support systems with it. The IMS infrastructure components have standardized charging interfaces (Ro/Rf). These are based on the DIAMETER protocol and shall support both on- line Bela Varkonyi 11 Financial Models for IMS Based Services

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and off- line charging. Even the mediation function could be part of IMS in the form of a Charging Collection Function (CCF).

2.2 New Business Models in Telecommunications


2.2.1 IMS Value Chain
IMS introduces radical changes in the value chain, too. The traditional mobile networks are based on vertical integration of network and services. IMS focus on a loose integration of more players than before [Mavrakis and Kamal-Saadi 2006]. The number of infrastructure and service providers could be increased because of the open standard interfaces [Figure 2-4]. The easier integration of new partners reduces the time-to- market significantly. Figure 2-4. New IMS value chain

On the other hand, there are new dangers with this openness. If the operator is not able to come out quickly enough with new services, anyone else could do that using the operators IP network as a dumb bitpipe. Although this way it is difficult to provide guaranteed quality of services (QoS), as the Internet has proved it the best effort services could be just good enough and no one would pay extra for the premium quality. The operator may have some advantages though. It owns the customer for a long time, it has established a brand and loyalty, it has a sophisticated shop network and other well established marketing channels, and it also has a very fine tuned customer relationship mana gement and service operations. If packaged together properly, these features might be attractive to a potential competitor to become rather a part of the ecosystem as a specialized provider of only once compoFinancial Models for IMS Based Services 12 Bela Varkonyi

University of Pcs Faculty of Business and Economics MBA Program

nent of the end-to-end service. So the operator can still keep the control and stay the most profitable element of the value chain.

2.2.2 Technology Innovation Impact


IMS/NGN technologies are mainly evolving as a software solution enabling more and more applications to be developed very quickly. As [Mauboussin and Hiler 1998] point out this capital is very much different form physical capital in 3 main aspects: non-rival good, low incremental costs for new applications, increasing returns. Although the classical telecommunications vendors do their best to maintain their old closed frameworks and linear value chains, sooner or later IMS/NGN and Web2.0 will push the operators to open networks and economic webs. Closed garden data services will be opened to the internet, 3rd party developers will get more access to the telecommunications infrastructure. When applying IMS/NGN technologies we can expect the 7 major mechanisms identified by [Mauboussin and Hiler 1998] to be valid. High upfront costs can be clearly seen from the original bids done by vendors and the attempts to create risk sharing contracts between operators and vendors. It is also supported by the steep organizational learning curve and the high efforts in OSS/BSS integration. Firstmover advantage is expected by operators and clearly proven by Ericsson and Nokia Siemens Network in the vendor space by grabbing the majority of IMS contracts. Path dependence could be studied on how HSPA is killing Wifi and WiMax hopes and similar schemes could happen with IMS/NGN if not delayed for a too long time. Tipping points are a way of everyday life for mobile operators and IMS/NGN would not be an exception. Network effect is also proven by the failure of alternative VoIP services in competing with classical mobile solutions. Positive feedback is very common in internet based services. Lock- in is also common with telecommunications operators, although regulators tried to break it with number portability schemes. However, it had only limited effects and loyalty is still very strong and churn is kept under control. A proper IMS/NGN investment decision and project execution might benefit from the expected results described by [Mauboussin and Hiler 1998]: increasing returns, monopoly rents, dominance of an inferior product (IMS/NGN might be considered as such by alternative solutions). Once we move to IMS/NGN we will see Bela Varkonyi 13 Financial Models for IMS Based Services

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some characteristics such as a bigger economic web by utilizing open standards interfaces everywhere, arising complementors such Microsoft and Cisco Systems, and the punctuated equilibrium behavior making our revenue estimates very much uncertain. Other advices from [Mauboussin and Hiler 1998] could be also applied to IMS/NGN: heavily discount new products to catch market share, link and leverage especially in presence and instant messaging, use the power of economic web with suppliers, partners, and customer communities such as iWIW, do not waste to much efforts on optimization, rather focus on quick adaptation, and apply psychological warfare against your competitors in clearly demonstrating your competitive adva ntage continuously. It is very important in the new economy to extend the competitive advantage period, since this is the most important driver of shareholder value.

2.2.3 Structural Changes


IMS brings a change in the paradigm how services are organized a mobile network. Traditionally, each new service was deployed as a vertical silo with its own solutions for similar functionalities such authentication, authorization, accounting, session management, load balancing, remote management, charging, etc. One of the big promises of IMS is to increase the reuse of existing resource by introducing a horizontal structure into the service architecture [Mavrakis and Kamal-Saadi 2006]. A common call control layer is put between the converged IP access network and the application logic [Figure 2-5]. Figure 2-5. Service architecture evolution

Utilizing this new IMS service architecture the telecommunications company may speed up the rollout of new services significantly, since a lot of development Financial Models for IMS Based Services 14 Bela Varkonyi

University of Pcs Faculty of Business and Economics MBA Program

and system integration work is not repeated, just reused. The additional costs induced by a new service are reduced, since we need much less hardware and software, too. However, the IMS infrastructure is very complex and might be also relatively expensive. According to [Mavrakis and Kamal-Saadi 2006] the overall cost saving could be achieved only if at least 4-5 service are launched on top of the common IMS core [Figure 2-6]. Figure 2-6. New revenue and cost charateristics in IMS

It is a very important issue how to establish a business case for the IMS infrastructure, since it does not generate any revenue, only the services could. When we implement these services, the IMS core costs would be already sunken costs, except some capacity extension generated by the new service. But when we look at the overall performance of the company, the large initial investment into the IMS infrastructure cannot be ignored, decision makers tend to have a reverse sunken costs effect [Johnston 2000]. Later we will suggest solutions for this problem. Besides the long term cost advantages, we should not forget the IMS enables a new type of service development. Because of the small marginal costs and the simplicity of introducing a new service, the operator is able to setup a new service very quickly and it is possible to terminate the service and replace it with another one a shorter time scale. So IMS brings an agile production facility to the telecommunications world that supports mass customization. Much smaller market segments could be targeted with specific products than ever before.

Bela Varkonyi 15

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University of Pcs Faculty of Business and Economics MBA Program

2.2.4 Customer Models


Telecommunications customers are usually divided into two major market segments: individuals and companies. In September 2007 both Magyar Telekom and Vodafone Hungary has been reorganized around this idea. Further segmentation is done on potential revenue generation capabilities. Sophisticated CRM systems are able to do even micro-segmentation. Marketing campaign for new products can be extremely targeted based on long-time statistical analysis. This fine tuned valuebased pricing [Torrance et al. 2007] is the major asset of classical telecommunications companies on which they can build their survival strategies. Figure 2-7. Value -based pricing opportunities

Source: [Torrance at al. 2007]

IMS is very well tuned to this type of customization unto smaller market segments. It support a quick time-to- market, since only control logic has to be deve loped as new in the form of an applications server, all other components are ready to be reused. The only delaying factor could be when we overstep a capacity limit in the IMS infrastructure and extension is not avoidable. IMS also helps to introduce agile production and mass customization schemes that are successfully utilized in classical industries such as car making. Fine tuning services for micro-segments provides one of the secret tools of the big telecommunications companies. Other Web based competitors such as Google or Skype could not own the customer so well as the legacy telecommunica-

Financial Models for IMS Based Services 16

Bela Varkonyi

University of Pcs Faculty of Business and Economics MBA Program

tions firms. Differentiation by offering many smaller services would help to achieve the goal of better price discrimination and thus maximizing revenues. There are two major indicators for customers. On is the Average Revenue per User (ARPU), the other is the Customer Lifetime Value (CLV). The ARPU is usually calculated on a monthly basis and extensively used in international benchmarks. Marketing efforts are often centered on certain ARPU goals, so simpler financial models in many cases just apply a simple ARPU estimate or forecast. Revenues are calculated by multiplying the number of customers with the average ARPU. While this works well for basic GSM voice services, we would suggest to use somewhat more details models for IMS services, since here each service will have much less users for a much shorter time and regression based forecasting could not be done properly. The CLV is the present value of all future expected cash flows from a specific customer. Even real options could be taken into account in the CLV calculations. The CLV driven management is only possible with sophisticated CRM systems, so it is quite a recent trend. Based on the CLV the operator various actions: high CLV customers would get preferential treatment in the shops, in call centers, in on- line services; they would also get special loyalty programs and offers; some campaigns shall be targeted directly to them. On the other hand, very low CLV customer might be handled with degraded services, they would get no discount or other benefits, sometimes they would be even encouraged to move to another operator. One smaller fixed- line telecommunications operator in the UK went so far, that they kept only the top 1000 business customers to become really profitable. In IMS financial models it is important to relate all revenue estimates to ARPU and CLV, since for these indices it is easy to make historical comparisons to cross-check the reality of the forecasts done in natural measures. A critical point in determining service uptake by customers to know what handsets or terminals are available in the market and what the customers already own and use. The capabilities of the terminals shall be analyzed against the service requirements and for each new service the overall available terminal numbers shall be estimated. This would make an upper limit on the number of subscriptions. The willingness to pay for services could be very much different from market to market. One good example is push-to-talk that was a big success in the USA and a Bela Varkonyi 17 Financial Models for IMS Based Services

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big failure in Europe as well as in Hungary. Probably such problems are also rooted in finding the right marketing strategy and especially not selecting the proper pricing. There are also significant variations on what type of rating schemes could be accepted, but the general trend is to go into the direction of flat rates. However, flat rates are difficult to handle in terms of resource consumption. A good example is Internet services. Some customers download so much, that they generate big losses for the operator. Some companies silently terminate such user because of a violation of fair use policy, some companies establish upper limit quotas on critical resources. In IMS services we have serious resource management concerns since it is an inherently multimedia platform and it requires an always-on network connection, so some kind of bundling and packaging is necessary to balance out the wish for flat rates or controllable costs at the customer and the overloading and service degradation as a result of uncontrolled usage.

2.2.5 Supplier Models


In classical telecommunications the pricing for supplied technology platforms and solutions was based on a revenue sharing model. In this scenario both the operators and the ve ndors are monopolistic or oligopolistic, there are hidden cartels, and the game between these two players may lead to rather unexpected costs. Recently there has been a strong consolidation in the mobile network sector, so currently there are only less than 10 global suppliers who would have any chance to win a bigger RFQ. Sometimes the operator and the vendor live in symbiosis, operators might even outsource the whole technology organization to the supplier (Ericsson and Nokia Siemens is very successful in this area recently). If revenue sharing means a pay-asyou-go model, then it also contains a risk sharing agreement and thus in could be even very beneficial for the operator to introduce new revenue streams. However, later the costs might become too high. Revenue sharing appears in many cases in the form of the customer usage based licensing fees. This is in sharp contrast with typical IT and IP network components where only technology limits would enforce buying more equipment and thus increasing the costs. Sometimes the scene is not so clear, and if an IT company is too dominant in a certain field, they start behaving like a telco vendor quite soon.

Financial Models for IMS Based Services 18

Bela Varkonyi

University of Pcs Faculty of Business and Economics MBA Program

In classical IT or IP networking the pricing is usually cost based and they are relatively fixed margins maintained for a longer time by the vendor. The reason behind this is the much bigger competition, so the prices are more determined by the market and less by the individual negotiations. Large telecommunications companies could get significant discounts on list prices. Sometimes this could be between 3050%, so practically the vendor has no profit on these sales. They just do it for the value of refe rence and volume, and in hope for future technical support revenues that may be up to 7-15% per year of the original purchase price. The telco and IT pricing models are also contradictory because the scales are very different. Typical IT and IP products are produced in a high volume, so the ve ndors could benefit from the relatively smaller fixed costs of development. Usual telco products have only a few licensees, they require a lot of customization, so the high development cost shall be distributed unto a few projects only. Historically telco vendors preferred a lot of proprietary solutions, even the vendors encouraged it in many cases to kept their monopolies and lock in the customers. Only recently we have seen the role of open standards becoming dominant in the telecommunications space, too. One such example was the GSM network. Ho wever, here the investment costs were so high to enter the market, that the oligopoly of the vendors was not broken. IMS promises to get the best out of the IT and IP ne tworks business model. IMS components and solutions could be delivered globally and locally by many dozens of serious players. So competition is significantly increased. IT culture companies could reduce prices significantly. Of course, the classical telco vendors did not give up their practices, they try to be very quick to get into IMS and then use all kind of trick to keep out the newcomer IT companies. Another trend is to offer hosted services by third parties for operators. Actually, in the case the operator might be even degraded to an access pipe, and most of the revenue is taken by the hosted service provider. Unfortunately, IMS could be such a service, since it relies only on a general IP access, so anyone would be able to start IMS services without even consulting with the operator. This is similar to Skype, Google, MSN, etc. Hosted services are very much liked by marketing or bus iness development when the forecasted volumes are small and risky. There are no big upfront investments and still the customer needs could be satisfied. But it has an im-

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Financial Models for IMS Based Services

University of Pcs Faculty of Business and Economics MBA Program

portant consequence, we sell out our business and the operators might become a dumb pipe only, and its size shall be reduced significantly. IMS is considered as strategic investment by most telecommunications companies. They do not want to follow the path of the typical internet providers, they believe in the concept of an intelligent network. But because of the intense competition from other business models such as Google, it is critical to keep IMS investment costs as low as possible. This means the open standards and interoperability shall be emphasized. One example is the usage of carrier-grade, high-availability hardware. The dominant standard that fits well with IMS is the AdvancedTCA (ATCA). The cost of a classical telco server and an ATCA server might differ by one magnitude (!). Classical telecommunications v endors do not like ATCA, since it gives too much freedom to the operator. However, it is in the basic interest of the operator to push for open standards like ATCA, since only such a policy would give a best-of-breed mixing and matching possibility. Operators may go so far, that they could buy the ATCA system for a hardware specialist in high volume for multiple systems, and for each applications they would buy only the software and the system integration from the telco specia list. For the new contenders ATCA may significantly reduce the cost of entry into the IMS market [Partridge 2006]. Because of these trends, in IMS financial models the cost of hardware and software shall be clearly separated and cannot be fused together. Classical telco ve ndors will still try to play by moving costs from one category to the other, but this should be discouraged by the operator as much as possible with special requirements in RFIs and RFQs. The operator shall also insist on having more cost based pricing and less customer traffic based royalties. Since a lot of standard IT components are used, the quickly decreasing prices shall be expressed in models by some mandatory price erosion schemes. Other prices should be also maximized in nominal values and even inflation based correction shall be avoided in contracts motivating the ve ndor to sell its software to more companies. Only in human resource intensive components such as system integration, technical support, and training it is advisable to accept inflation based corrections. To control all these goals, the supplier costs shall be divided into multiple categories and future costs estimates shall be cross-checked

Financial Models for IMS Based Services 20

Bela Varkonyi

University of Pcs Faculty of Business and Economics MBA Program

against these recommended policies (if they were put already or could be put into the supply contracts). Another important characteristic of IMS supplier cost estimation is the significant stepwise nature of capacity extensions. Adding a single ATCA blade to a softswitch may increase the customer serving capacity by even 100,000 users, and the hardware cost for this could be below 5,000 EUR. Of course, license costs would be much higher, but even this would come in big packages. So when we introduce a smaller IMS service, the necessary capacity might be already there, but if we are the edge we may incur extra costs. Thus customer traffic to investment cost transformations could be very much non- linear and even stochastic based on how the race condition with other services for common resources is happening. In a few years, when IMS solutions will mature enough for supporting true agile production and mass customization, then financial models for new IMS services shall be revised significantly. In this future situation most new services will be very much short lived, only a few months, or maximum 1-2 years. Present value based complex calculations would become a little bit overkills. A lot of services could be created even directly by the customer utilizing so called mashup platforms. In this case, the major investment decision will be about the mashup platform and not the individual services.

3 Existing Financial Models in Service Management


3.1 Financial Control of Service Development
3.1.1 Business Development Planning
In efficient companies service management is driven by business planning and not left alone for technology people to execute their dreams. Business development planning is strongly related to the company wide annual financial planning cycle as described in [Br, Nagyn Sfr, and Urbn 2000]. It starts with a collection of ideas for generating new revenue streams, improving on existing services, or terminating unprofitable business activities. The bottom-up driven catalog of project ideas is carefully studied for feasibility. Both the technology and financial aspects are analyzed in parallel. Based on the results of the feasibility studies a list of candidate projects is generated by the business development department. A detailed CAPEX Bela Varkonyi 21 Financial Models for IMS Based Services

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and OPEX plan (together with revenue forecasts) is created to estimate the overall effect on the companys financial results. If the aggregates do no fit with the strategic plans, then an interactive adjus tment process is started. [Br, Nagyn Sfr, and Urbn 2000] identify 3 major directions to provide the necessary balance between the strategic expectations and the business development capabilities. The reduction of result expectations is very rare and almost never happens yet in the telecommunications sector. This may change in the future, since there are serious problems with current business models. The usual 30-40% of EBIDTA ratio might not be possible in the future, and probably a 10-20% ratio should be accepted by the owners (closer to what can be achieved in classical industries). Increasing revenues is the first priority in telecommunications companies. However, most of the markets are declining or saturating in developed countries (such as Hungary). That means that it is very difficult to make significant increases on the short term, a killer application is still not found. There are some claims that IMS will help to rescue, other candidates are IPTV and community-based services. All these problems lead to the most common solution nowadays: cutting the costs. The business environment in telecommunications change very rapidly, so it is quite typical to review all the business deve lopment and the underlying CAPEX and OPEX plans each quarter. Practically the business plans are not static even inside one business year. Rather they are dynamically adjusted with quarterly rolling updates. Monthly modifications are not used, since the planning process would not fit into such a short period. The yearly business plan is approved by top management, while smaller adjustments are delegated to middle level managers. If the quarterly update becomes significant, then the approval goes back to top management. The approved business development plan lists all those projects that are allowed to be executed. However, business as usual technology activities, such as general capacity increases, are currently typically not included in the business deve lopment plan. That means that the technology departments have such CAPEX and OPEX items that are not directly related to bus iness development plan items, but handled directly by the overall strategy planning of the company. This is a shortcut to ease the burden on some of the overloaded organizational units, but it may lead to suboptimal performance. Financial Models for IMS Based Services 22 Bela Varkonyi

University of Pcs Faculty of Business and Economics MBA Program

The future goal shall be treating all investments in the same framework and do not let technology departments to make investment decisions without the direct involvement of the business development department. However, this assumes a highlevel technology knowledge inside the bus iness development organizations that is not always available. In this case, an optimal planning is not guaranteed and techno logy departments have to play partially the role of business development. This is a serious conflict of interests, and could easily undermine the efficient operations of the company. In a fast growing market situation such problems can be hidden from the owners, but in a declining market the conflict will come to the surface. So a proper financial modeling will become even more important.

3.1.2 Service Development Planning


Service development planning is normally driven by an approved annual business development plant. However, in such fast moving markets as mobile ne tworks, sometimes this sequence is very difficult to keep. OPEX and CAPEX forecasts might be needed in summertime already, while the business plan is finished only at the end of the year. Because of that, the CAPEX and OPEX budget owning technology departments have to do a lot of estimates on what the business development department would propose later. This requires a lot of practical experience in financial modeling. In an ideal situation, after a business development idea is accepted for further investigation, a feasibility study is done mainly from the marketing perspective. If it looks promising, then high- level investment cost estimation follows. If it still looks good, then the technology departments have to do a more detailed CAPEX and OPEX forecast. Usually this would be based on price quotations from vendors. In most cases this is impossible, since prices are almost arbitrary in many projects, and only a minority of service developments could work with standard prices are already done contracts. In IMS we can move to a more standard pricing, especially with the infrastructure components, so the cost forecasts might become more reliable than usual. [Varga 2007] also emphasizes that in real practices most of the CAPEX and OPEX forecasts are based on previous experience. It is a common problem at various types of companies that at the time of the planning typically full price quotations are Bela Varkonyi 23 Financial Models for IMS Based Services

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not available. To be able to make such a historical analysis, the various projects shall be allocated to long-term hierarchical, aggregating financial project codes. Without this, a comparison to the past would not be possible. If time and resources allow it, then a Request for Information (RFI) tendering process is started to get better input date for the cost forecasting. However, in an RFI vendors may not want to reveal their true prices, and also they are a lot of uncertainties in the technology solutions that would influence the overall costs significantly. Since RFIs could eat up a lot of resources, it might be also used to establish a shortlist from the most promising vendors. Later on, when the project gets into the execution phase, only these suppliers would be invited for a Request for Quotation (RFQ) tender. This is necessary to keep motivating the vendors to send resources on answering the RFI. Once a project proposal gets through all the filters, they are ranked by the estimated investment costs. Projects above a certain threshold require the creation of a business case (BC) and a higher decision body shall make an approval based on the result of the business case analysis. A project can be continued only after the BC has been approved. The RFQ is usually very resource consuming, so normally it is not allowed to happen before a preliminary BC decision. However, once we know the real prices as a result of the RFQ process, the BC shall be updated, and the decision bodies must be consulted again to get a final approval. All project requests, active and closed projects shall be maintained in a multiproject management (MPM) system in a big telecommunications company. There could be more tha n a thousand projects, so portfolio management would not be possible without proper information systems support. Standard MPM products can manage a lot of information efficiently, but in most cases they are not able to handle the financial models required for a BC. Only the end results might be entered into the standard MPM systems. Because most of the CAPEX planning is based on historical data with a lot of uncertainties, it is very typical to plan a lot of buffer budget by the technology departments that the financial controllers are not able to recognize. Once the budget execution is started, usually a significant part of the budget will not be consumed, but a lot of new requests also arise. The middle level managers are highly motivated not Financial Models for IMS Based Services 24 Bela Varkonyi

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to give back any unused resources, so they would allocate these remains to their pet projects, and financial controllers would have a hard time to avoid getting unprofitable projects into the portfolio. These under-the-radar stealth projects are generating sunken costs that would make future business cases look better. This may mislead the decision makers on the true profit contribution of a project. However, until the financial controllers do not learn technology in more details, they have no chance to discover if different cover names really hide various parts of a bigger project just to stay below the detection thresholds. On the other hand, if the technology departments have a better strategic thinking than the marketing or business development departments who might have very short-term motivations, then these stealth projects may generate a lot of valuable real options and create a true competitive advantage. Too much tightness and bureaucracy might do more value damage on the long-term than saving some immediate extra costs. The black art is to find the right balance between financial control of service development planning and the flexible real options created by technology pet projects.

3.1.3 Investment Business Case


It is very common in the whole ICT sector, not just in telecommunications, to create a Business Case (BC) for each new project proposal that oversteps a predefined investment threshold. [Lancz 2006] emphasizes the role of the BC in supporting the comparison of decision alternatives. [Varga 2007] compares four major financial analysis alternatives in current corporate practice and concludes that we should select the best fit for the project on a case by case basis. [Lancz 2006] focuses more on the cost analysis, since its scope is only IT that is in many cases only a cost center. It adds up the VCO and TEI methods to the usual ROI, NPV, TCO, weighted scores approaches. The TEI model is not very much liked by financial departments since it gives too much freedom to the technology departments for creative virtual savings that could not be realized later. The VCO model is practically a subset of the TCO. The current practice of big telecommunication companies prefer the TCO for evaluating even supplier quotations in RFQ processes. [Varga 2007] suggests certain breakdown structures for the costs and benefits calculations : CAPEX vs. OPEX, software vs. hardware, real and virtual savings, diBela Varkonyi 25 Financial Models for IMS Based Services

University of Pcs Faculty of Business and Economics MBA Program

rect and indirect costs, etc. Since most companies do something similar we will also follow these ideas in our later modeling proposals. In our opinion, the static ROI method is not a good fit for telecommunications services, since their typical lifecycle spans many years, so the time value of money should not be ignored. The NPV and TCO methods are not really alternatives. Rather the cost element of an NPV analysis should be estimated by a TCO methodology. However, there are some projects, where direct revenues cannot be identified, and cost saving benefits could alone justify the investment. If the project is very shortterm, then an NPV analysis is not necessary. In the IMS services area, we would not expect such short projects in the near future, so we would stick to a combination of NPV and TCO. [Lancz 2006] correctly points out that process of creating a Business Case is sometimes more important then the specific resulting numbers. The mandatory BC creation rule over a threshold is a very efficient tool to enforce some discipline into the capital budgeting activities. Without this, a lot of too risky projects would get through and the company could suffer on the long run. However, the BC creation may take up a lot of resources and time, so if done in a too formal way, it might have a bad impact on time-to- market goals. In big enterprises the interests of the owners and the top ma nagement are difficult to enforce. Top management can determine the overall budgets for certain activity categories, but they have no chance to control one-by-one a project portfolio with tho usands elements. So the middle management has a lot of freedom in actual capital budgeting decisions. Sometimes they are motivated to cheat the BC rule by artificially dividing bigger projects into smaller ones. Financial controlling has a difficult task to discover such schemes and enforce a consistency in project structures. One of the best mitigation against BC fraud is to make the BC process simpler and less bureaucratic. This could be supported by good templates and software based automation tools. Our aim is to provide such means to satisfy both the controlling objectives and reduce the workload on the already very busy project managers. Another big problem of BC creation is the inherent uncertainty of cost and revenue estimates based on the usual planning process sequencing. Here again the middle management motivation could be significantly different from the overall company interests. They want to build their own little empires by grabbing as much Financial Models for IMS Based Services 26 Bela Varkonyi

University of Pcs Faculty of Business and Economics MBA Program

resources as possible. However local optima would not add automatically into a global optimum. Middle level managers could easily offset revenue and cost estimates, so they would get approval, although the project does not have a positive contribution when evaluated properly. The current mitigation strategy against BC fraud is usually based on the transparency of estimations and peer-to-peer review. A critical point is to insist on getting the estimates in natural terms (such as number of compatible handsets, potential customers, usage and traffic patterns, pricing schemes, etc.) and calculate the financial numbers by well established models only. Direct modifications of financial numbers shall be avoided as much as possible. However, it should not be forbidden totally, since models are never perfect, so fine tuning might be necessary. This shall be an exceptional process, and special compensating controls should protect the global company interests. It is also important to have many value generating projects, so if we reject too much, then the company will also go out of business. It shall be clearly communicated, that only marginal revenues and costs shall be taken into account that are the direct consequences if we do this project or not. Sunken costs and other fixed costs that are not related to the project decision shall not influence the approval of rejection or the project. In classical investment decision studies we see a single upfront investment only. In real life at telecommunication companies this would not be a proper model, since the border between OPEX and CAPEX is very fuzzy and bigger investment costs are almost always distributed in time somewhat. For example, it is a usual practice to pay only 80% at acceptance and commissioning, and pay the remaining dues only after a longer stability testing period successfully passed. It is also typical to include the first few years of support costs into the guarantee services, thus practically converting OPEX into CAPEX. We have studied some existing investment business cases from a big telecommunications company. Unfortunately, we cannot publish the details since such business cases are top secret. However, we can summarize some characteristic points about the structure and key performance indicators applied. The cash-flow balances are estimated indirectly from natural measures, but all calculations are done in a rather monolithic single workbook with very few auxilBela Varkonyi 27 Financial Models for IMS Based Services

University of Pcs Faculty of Business and Economics MBA Program

iary worksheet added. The basic idea is to compute the NPV of the free cash- flows (FCF). These models also calculate the IRR. The calculative interest rate is WACC, although sometimes a risk premium is added. The cash flow definitions could be very much different from BC to BC. The basis is the EBIDTA contribution, but many types of opportunity costs could be added, tax shields or other tax effects might be taken into account or not, terminal value handling varies. This is not different from what we could see globally in the financial literature [Ehrhardt and Wachowicz 2007]. However, the FCF definition inconsistencies make practically impossible an appropriate comparison of multiple projects. Currently, this is not a big issue, since the BC is used only for filtering, but not for project ranking or portfolio planning by mathematical programming. Basic sensitivity analysis might be added to the worksheets. Risk is managed either by a risk premium in the discounting rate or by a scenario analysis. The BC is not always related to specific project, it might be about the history of a service and the expansion of it with some new features or more capacity. In this case, there are a lot of technical and marketing KPI values added to the analysis. It is also difficult to reconcile the BC with the actual CAPEX and OPEX plans. They seem to be quite disconnected. There are many project specific structures, although the basic guidelines are consistent. It is left very much to the discretion of the financial modeler which components to include or exclude, and it usually difficult for another person to fully catch the logic of the modeling decisions. The presentation of the computations and results is not standardized and very difficult to audit and trace. End results could be entered into other financial systems such a SAP or Cognos, but the most important parts of calculations are always done in Excel. The spreadsheets are managed exclusively by the financial department, the technology or marketing departments have limited or no access.

3.1.4 Investment Decisions


[Fnagy-rva and Zman 2005] summarizes an investigation of controlling methods in Hungary. The dominant tool for project decisions is the Net Present Value (NPV) of future cash- flows. It is also common to compute the Internal Rate of Return (IRR), the Return on Investment (ROI), and the Payback Period. Other measFinancial Models for IMS Based Services 28 Bela Varkonyi

University of Pcs Faculty of Business and Economics MBA Program

ures, such as the Profitability Index (PI) are very rare in real life practice. We have to emphasize here that in most cases the investment decision is driven by 3-5 measures and not by a single variable. For past performance evaluation the most popular measures are PBT, revenue, EBIT, EBITDA, ROA, ROE. Quite often they also use EVA, ROCE, or NOPAT. Of course, these are mainly for the whole company evaluation, but they could be used for projects as well (with some modifications). In management incentive programs the top measures are EBIDTA, ROCE, EBT, NOPAT, PBT, revenue, and EVA. Here again in most cases the eva luation is done by 3-7 performance indicators. [Ulbert 2002] argues that investment decisions shall be made in two phases. First a simple static analysis should be done that filters out wrong proposals. Then a dynamic analysis should be applied taking into account the time value of money. Current telecommunications practice in Hungary does not follow this two phase model. Only dynamic analysis is done, classical static analysis methods are adapted to take into account the time value of money. One example fo r such adaptation is the dynamic payback period described in [Ulbert 2002]. There are multiple reasons for this approach: the high volatility of interest rates and currency rates, the high risks in revenue realization in packet switched services, the general availability of spreadsheet tools to do discounting easily, and the financial culture where mostly young people do all the calculations who were already taught to do present value or future value calculations by default. The decision workflow in a typical big telecommunications company might be different based on the size of the investment project. Before a project is started various management boards discuss and approve the proposals and the attached BC. Once the project started a project governance committee controls the refinement of the financial parameters of the project. Capital budgeting is done in a rather heuristic way. Project proposals are filtered in multiple rounds partly based on the BC, but also taking into account a lot of other aspects. BC KPIs are generally not used for ranking only for filtering. The iterations are continued in multiple rounds until they fit into the previously approved budget. First the CAPEX plan is created, and a little bit later the OPEX plan, since it has some dependencies on the approval of the CAPEX plan. Each organizational unit has some freedom to shuffle budget among Bela Varkonyi 29 Financial Models for IMS Based Services

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their own projects, but regularly they have to explain it to various levels of techno logy decision makers and financial controllers. Bigger modifications have to be sent back to the management boards to get an approval. Minimum each quarter a full review is done. Unused budgets are collected and reallocated to new proposals. There are always a lot of proposals sitting in a waiting in queue. If resources become available, then first they evaluate the projects from this queue and if there still resources left, then they initiate new proposals.

3.1.5 Project Controlling


Project controlling is becoming recently an important part of the overall project management process to avoid the high failure rate of ICT projects that characterized the history up to now. [Vry 2003] defines the role of the project controller as a bridge between the project management and the financial system. The project controller would help the project management in high- level planning of performance and costs. She could also help interfacing to the financial system for detailed revenue and costs planning and monitoring, or even involved in liquidity management. If we have a project controller than the project management might offload such duties as return on investment analysis, traffic and profit forecasting, human resources time controlling. In current telecommunications practice this role is taken by a dedicated controlling expert only in very big projects. However, the lack of a professional project controller in middle sized projects causes a lot of problems. As a minimum, a bus iness case is usually prepared for the investment decision, but then there are no resources to implement a continuous project controlling process properly. The modeling tools we propose in the later sections will make it possible that project managers and project coordinators with background in technology would be able to fulfill the role of a project controller more efficiently. Once the project has been approved and project execution is in progress, it is very important to control the project and make corrective actions as soon as possible. [Nemeslaki, 2006] suggests using the project Earned Value Analysis (EVA) for this purpose. It is well supported by usual IT systems for multi-project management (e.g. Microsoft Project Server). However, in the big telecommunication companies they might use simpler methods, since in the huge project portfolio not the individua l proFinancial Models for IMS Based Services 30 Bela Varkonyi

University of Pcs Faculty of Business and Economics MBA Program

ject performance, rather the whole portfolio performance what really counts. In new technologies the uncertainties are so high, that deviations from plans are the norm, not the exceptions. IMS based services fall into this category, while capacity extension projects of established networking technologies might be handled with the classical EVA method. It is common in the telecommunications sector to use a multi-project management (MPM) system, as defined by [Tth 2001], to have a better control over the hundreds of projects running in parallel. If the project justifies the extra efforts of maintaining detailed financial information inside the multi-project management system (MPM), then all the project-EVA related calculations and reports are practically given. (A good example for such a software tool is the Microsoft Project Server combined with the Microsoft Sharepoint Portal Server with some company specific adaptations added.) So we do not focus on this aspect, since the functions of a project controlling subsystem as described by [Tth 2001] are already covered by the MPM software, we just interface to the MPM system if necessary. Usually MPM systems can handle special information on the critical problems in a project. Once a project is started, the project manager has to specify what the main risks are in the project execution. The project might be time critical, cost critical, human resources critical, etc. And here comes the role of the business case. Based on the return on investment analysis we can identify if the proposed project is cost critical. If yes, then the project manager will have an important guide where to focus the project management efforts.

3.2 Financial Control of Service Operations


3.2.1 Revenue Monitoring
Once a service becomes active, or launched commercially financial controlling shall monitor the revenues related to this product or service. Project performance evaluation could be very difficult if multiple projects results in a single product or service. In the ERP system there is a significant level of aggregation, so sometimes it is impossible to acquire the necessary data from there. The rescue might come from the data warehouse. Here the financial controller might find the history of those natural measures that were used to calculate the origi-

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nal business case. Based on this extract it is possible to determine certain ex post evaluation values. Not all services might be integrated properly with the data warehouse. It is the responsibility of the project manager to make sure that data warehouse support is built into the service. However, time-to- market pressures and costs cuttings could block these efforts. A lot of smaller volume or less critical services might be left without proper historical data for ex post performance analysis.

3.2.2 Cost Monitoring


Cost management starts with procurement. It is very important to have a lot of guarantees already in the supply and support contracts to limit the risk of i n creased costs. When extensions or upgrades are ordered based on a framework contract, then procurement always crosschecks if the proper prices were used. Cost monitoring is also support by the MPM system in the development phase. A project might need multiple control codes to serve the various reporting needs. As a minimum we have an MPM project code that links the project to demand management, risk management, and project documentation systems. We also need some financial accounting project codes for the ERP system. Yet another code is used for budgeting: each project shall have some related CAPEX/OPEX plan codes. But it might other than a simple one-to-one mapping. Procurement could use the CAPEX/OPEX plan codes to cross-check if a purchase order has an approved budget behind it. Budget plans are also used to make a variance analysis with monthly reviews and corrective actions are trigged multiple times in each month by financial controllers to keep the cash- flow close to the approved plans. The MPM system could be also used to collect time-sheet data about internal employee efforts. Since this is a development work that increases the value of the produced asset, the human resource (HR) costs are loaded into the ERP system to the specific product category and asset to which the project belongs. When the product of the project is activated, the HR CAPEX will be included in the starting book value of the asset. This process could be quite important in a big telecommunications company, since these costs would reduce the tension on the EBIDTA targets. HR CAPEX could be in the range of a few percents of EBIDTA, so it cannot be ignored.

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University of Pcs Faculty of Business and Economics MBA Program

However, it creates a lot of issues with the tax authorities so a detailed explanation and documentation is critical to have these costs accepted a CAPEX at tax audits. When the service becomes active, a product mana ger is assigned at the ma rketing or business development departments. It is the responsibility of this product manager to continuously monitor the financial performance of the service and make proposals when to terminate the service. It is quite common tha t a new service have no support costs for the first few periods. The support activities for this guarantee time are included in the project CAPEX. For the company cash- flow management it is very important to maintain the information when the support costs kick- in, since it increases the cash-flow needs significantly. It is the responsibility of the technology departments to add all outstanding support contract obligations into the annual OPEX budget. However, with so many products, services, and project sometimes mistakes are done, so proper spares shall be planned to accommodate unforeseen problems. Based on the recent market growth or decline problems there is a big pressure to cut OPEX costs. Because of this, most of the cost monitoring (for already active services) is organized around two major issues: technical support prices and the allocated internal or external operational FTEs. Technical support prices are regularly renegotiated and organizational synergies might be searched and headcount reduced. [Varga 2007] describes the hierarchical cost aggregation schemes that most enterprises use today. Typically they use multiple dimensions as summarized in [Br 1999] to label actual costs according to cost type, cost center, cost owner, related product, related project, etc. In the ICT business there are a lot of organization units that cannot be taken as profit centers, only as costs centers, so they have no revenue. This makes impossible to do a discounted cash- flow based NPV analysis with a positive value. Many services utilize common resources that do not appear directly at the service management organization. However, for the overall success of the company it is critical to present these hidden costs clearly using a TCO approach and charging these costs back to the profit centers. [Varga 2007] identifies 4 major methods for cross charging: Direct, when resource allocation is clear; Activity based, when resource consumption could be easily metered; Financial Models for IMS Based Services 33

Bela Varkonyi

University of Pcs Faculty of Business and Economics MBA Program

Output based, when transactions could be easily accounted; Proportional, when charging could be tied only to financial data. Typical ERP systems would support other means of cost allocation, too: such

as internal service prices based on market prices or cost plus margin models, cost transfer in the accounting system, and fixed cost sharing based on policies [Mszros 2005]. Modern enterprise practices would prefer Activity Based Costing (ABC) as described in [Gl 2004], but in real life this would be too complicated and the involved technology organizations would strongly object simplified models, since those might have a bad impact on the future capabilities and could offset to a very short term thinking. So we will propose such schemes where the customer charging data is the basis for cross charging the common infrastructure costs back to the ind ividual services.

3.2.3 Benchmarking
All major telecommunications companies in Hungary have foreign owners. In these multi- national environments benchmarking plays an important role in mana ging the various national subsidiaries. The revenue and cost monitoring systems are designed such that they could support these international benchmarking needs. B esides these externally enforced performance indicators, each company does regular benchmarking analysis in all other types as defined in [Tth 1999]: internal, between organizations, functional, and general. One of the most critical aspects is controlling the human resources (HR). Comparing various organizations is sometimes very difficult, since the processes and the employment schemes might be quite different. So HR benchmarking is done by using the so called Full- Time Equivalent or FTE. The FTE expresses the workload of a full-time employed average worker. In many cases a full FTE cannot be allocated to a certain task, so partial FTEs are also used. There are very strict benchmarking goals on the number of FTE per organization, per overhead, per product, etc. Typically counting FTE is not easy, since many functions could be outsourced, and sometimes this outsourcing is done on a project basis, so it is not an OPEX, rather a CAPEX cost. The resulting performance indicators may have radical variations, an engineering FTE in Czech Republic may proFinancial Models for IMS Based Services 34 Bela Varkonyi

University of Pcs Faculty of Business and Economics MBA Program

duce 15 times (!) more useful output in half of the time than in Germany. The FTE based measures are in many cases not directly related to financial performance, they are mostly used to evaluate how effectively utilize the various organizations the human resources and make decisions on organizational developments and reducing the head-count. Overall FTE benchmarking have a very significant effect on the daily life of typical multi- national telecommunications companies. When later we propose schemes for IMS services, then the financial considerations shall be accompanied by human resources planning and performance evaluation as well.

3.2.4 Profitability Analysis


Profitability analysis of a single project, product, or service is rarely done automatically. These types of calculations are normally needed only for capability or capacity extension. Because of the uncertainties and high risks the performance of the management shall not be judged on individual projects, rather on the overall performance of the business units. The management and employee incentive system is usually tied to the EBIDTA and maybe some other key performance indicators that could be easily extracted from the ERP system. If the organizational unit leaders want to be successful in getting their bonuses, then they should focus mostly on the EBIDTA contribution of the various projects in question. This might have a contradiction with the DCF based decision models usually pushed by financial controlling.

3.2.5 Service Termination Decision


Most of the telecommunication services have a certain life-cycle, and sooner or later each of them will be terminated and probably replaced with a new, nextgeneration similar product. The decision is mainly marketing driven, but operational costs are an important decision factor. It is very rare to have any terminal value on telecommunication services. Normally a service is abandoned only when the underlying systems are outdated and cannot be sold on the market. Software licenses are not transferable in most cases. Indeed, it would cause significant costs to help the existing customers to migrate to

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something else, to dis assemble, remove, and impair the physical systems, since they are considered usually as dangerous waste.

3.3 Existing Modeling Tools


3.3.1 Excel Worksheets
It is quite common to use Excel worksheets to support investment business cases. In current practice, for each project a different workbook is created, with special, individually developed tables and calculation, where only the fundamental methods (NPV/DCF) are the same, but everything else is rather different. No templates are used, difficult to understand all the details, transparency of the calculations is not achieved, peer-to-peer review is not a reality. If someone makes a mistake or error in the middle of the worksheet, there is very little chance that it would be detected. Building upon the results requires a lot of trust. The business case analysis is used for filtering only, not for ranking projects, so there is no pressure for making the workbooks standardized and the performance indices comparable.

3.3.2 Modeling Software


The dominant tool for financial controlling is SAP or other similar ERP systems as described in [Fnagy-rva and Zman 2005]. This is mostly useful for performance evaluation. However, even at those companies who have sophisticated ERP systems, it is still quite likely that Microsoft Excel is the tool that further processes the data received from the ERP system. The advantage of Excel is the transparency of the calculations and the unparalleled flexibility combined with low software costs. Adapting company specific controlling methods into an ERP system is both time consuming and expensive. Excel has some disadvantages, too. If the model becomes too complex it is difficult to catch errors, and it is also very complicated to detect intentional cheating. Why not to use commercial modeling software available on the market to achieve our goals? There are many basic problems with these tools. ERP software such as SAP is typically very much bookkeeping oriented and has some difficulties to handle an economic logic of cash-flow analysis. It is also not flexible, especially not for changing algorithms multiple times a day by any financial analysts. This is violating the basic principles how an SAP system is managed. The Investment ManFinancial Models for IMS Based Services 36 Bela Varkonyi

University of Pcs Faculty of Business and Economics MBA Program

agement module is a good example that it just an administration system and not a true decision support system. However, SAP could be very well integrated with Excel worksheets, so our models may have some SAP inputs or outputs. Another typical approach for budgeting is to use more sophisticated applications such as Cognos. It has much more sophisticated reporting, performance evaluation, and business intelligence capabilities then SAP, but it still lacks the modeling capabilities were are looking for, since it is difficult the simulate the technology capacity allocation process with it. Cognos may nicely complement SAP, too. We could find only one real telecommunications business modeling tool: STEM [Bailey 2006]. This has a lot of the features we would need, including input in natural measures, simulating the technology capacity and rating schemes, calculating all the investment evaluation parameters with enough flexibility. It is also endorsed by the ITU-T, so it could be taken as a de facto standard. However, it looks too complicated and expensive for our purpose. It does not have the cultural environment to be integrated into everyday work, the typical financial analyst, market forecaster, or technology planner may need too much work to invest into using such a tool. There is only one university in Hungary where occasionally teach for a small number of student recently, so it virtually totally unknown even in academic circles, and almost nobody has ever head about inside the telecommunications companies. Another big problem is that STEM is designed for investing into networks and services are somewhat different, so structural problems could also arise while building up service models. STEM is a good idea for future exploration, but it is a total overkill and not an efficient solution for our current problems. Our proposed Excel models might ease the migration to STEM, if a company decides to do so.

3.3.3 Business Intelligence Applications


One of the critical issues in the business modeling is how to estimate the future traffic and usage patterns. In some cases we could learn from the past, in some other cases this is not much help. If we can find a similar service to the analyzed new IMS service, then the historical data is definitely useful. For example the MMS might provide a baseline for the worst scenario of video sharing acceptance. There could be multiple sources for the historical service data. One is the data warehouse where all the basic traffic parameters and the corresponding marketing Bela Varkonyi 37 Financial Models for IMS Based Services

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and financial information can be extracted. The technology departments may also use the OSS/BSS systems for collecting performance management and accounting r e cords. These methods depend very much on the specific service, so we do not aim to standardize them. However, it is a reasonable requirement to provide placeholders for inputting such data into the business models.

4 Financial Models for IMS Services


4.1 Business Model
In everyday corporate life the term business model is used without really having a common understanding what it means. [Osterwalder 2004] defined an ontology for business models that was consequently developed into the Arvetica bus iness model framework illustrated in [Osterwalder 2007a] and [Osterwalder 2007b]. We will use this framework in our proposed IMS financial modeling tools [Figure 4-1 and Figure 4-2]. The framework will help us to organize the main cost and revenue drivers. Figure 4-1. Arvetica business model framework
INFRASTRUCTURE

PARTNER NETWORK ACTIVITY CONFIGURATION

OFFER

CUSTOMER RELATIONSHIPS DISTRIBUTION CHANNELS

CUSTOMER

CORE CAPABILITIES

VALUE PROPOSITION

CUSTOMER SEGMENTS

COST STRUCTURE

FINANCE

REVENUE STREAMS

Source: [Osterwalder 2007a]

There a large number of different business model proposal for IMS services. We do not want to vote for one or the other, since in the future there could many changes in business policies about IMS. Rather, we try to create such a modeling architecture where we can accommodate all the business models currently in consideration. In the next sections we summarize the basic guidelines how to do this. It is common in all business models that in financial modeling basically we have to deal with two main sides: revenue streams and cost structure. The model shall include a common breakdown structure for all services to help comparisons. On the other hand, special needs of certain services have to be supported by the general templates. Similar services could reuse not just the templates, but the already existing business cases, too. Financial Models for IMS Based Services 38 Bela Varkonyi

University of Pcs Faculty of Business and Economics MBA Program

Figure 4-2. Arvetica BMF example: Skype


eBay deliver voice & video quality free VoIP & value added services internet website global (non segmented)

software development

software development
Source: [Osterwalder 2007c]

large scale low margin

4.1.1 Revenue Structures


Revenue structures shall be designed for the mindset of marketing and bus iness development people. It should drive them to find all the important revenue drivers. They should enter estimates of subscriber numbers, usage patterns, uptake parameters, price flexibility, etc. It is important to provide some simple tuning parameters instead of forcing them to fill out hundreds of cells manually. So some default product life-cycle profiles should be included in the model. However, we should keep open the option to enter irregular shapes, too. Special attention must be given to forecast the terminal value of revenues at the product cycle tail. Our timescale is will be designed for such a long time that forces the retirement of the service in this period. Although a similar service could substitute the terminated old service, but this could be handled as a separate investment decision with the option to abandon. Since IMS services are focused on software in a quickly changing technology environment we can assume that there will be no salvage value at termination. The h ardware will be useful for nothing, and the software has to be redesigned practically from scratch for a functionally similar service. A good example for this effect is the retirement of the first generation IVR pla tforms currently due at many telecommunications companies.

4.1.2 Cost Structures


The cost structure shall be designed for technology and financial controlling or procurement people. It should drive them to find all the significant cost drivers. They should enter all the major components of the technology platform and all the related activities in project management, system integration, testing, technical supBela Varkonyi 39 Financial Models for IMS Based Services

University of Pcs Faculty of Business and Economics MBA Program

port, operations, etc. Very small cost components and initial investment costs uncertainties could be handled by a single contingencies item [Ehrhardt and Wachowitz 2006]. The risk-adjusted discount rate is not an appropriate tool for the investment costs estimation problem, although we could use it for the longer term revenue risk management. Contrary to the usual financial textbooks [Brealey and Myers 2003], we cannot assume that there is a single upfront investment, since in current practice the payment is divided into minimum two parts, but sometimes many smaller strongly attached other investments has to be done with a different timing. The single initial investment restriction would make it impossible to organize our projects in any natural way. This also means that wherever the literature talks about the single amount of investment, we have to replace it with the present value of the whole investment costs stream. However, to avoid the problems with real options discussed later, we should put only those items into a project that are part of a single run, and typically the project would either go through as a whole or not. In IMS services we just manage software, so working capital should not be a big consideration. Opportunity costs might be handled by the calculative interest rates. But to implement the total cost of ownership concept in a flexible way, we will implement items even for such cost drivers, to enable the human modeler to manage exceptions from the general rules. But we will sign these entries as exceptions, so an explanation for each such extra input shall be added.

4.1.3 Cost Dependencies


The most difficult part in business modeling telecommunications services is the correlation between traffic or usage and the costs. Here we need the input for marketing, that is technically easy to do, but it is almost impossible to capture the multiple feedback cycles of interactions between usage, capacity, costs, and prices without making our models extremely complicated. In IMS services the modeling people will find new challenges. Since IMS is based very much on the reuse concept, all the capacity allocation needs to take into account the stepwise nature of capacity upgrades. The dependencies between many services competing for the same resources will also increase the non-linear behavior

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University of Pcs Faculty of Business and Economics MBA Program

of the models. Non-linear modeling is always a big issue, since we may have only numerical solutions and the system can become very easily chaotic. In our proposed models we cannot solve all these problems at once. But we have to take into account the issue and provide such structures where these dependencies are very transparent and we leave enough space for the human modeler to control the details. There is still no better non-linear decision maker for very complex problems than the human brain.

4.1.4 Key Performance Indicators


Since few focus solely on financial modeling we do not want to include here a full balanced scorecard for characterizing projects. But based on our experience we need a number of key performance indicators (KPI) to support the decision makers properly. A single value, such as the NPV of future cash- flows would not be sufficient. In later sections we will propose in details the KPIs to be used for evaluating projects. Here we just emphasize that the main goal of such KPIs is to compare such investment opportunities that are difficult to evaluate to each other at the first sight. So these KPIs shall be reasonable for all imaginable IMS services. Otherwise, for some case we could not compute it and then the comparison becomes impossible. KPIs will be summarized in a special section of the model, so busy decision makers, who are not interested in the details, could quickly find them. We have to limit ourselves with the number of KPIs not make it too difficult to get an overview. On the other hand, we have to increase the number of KPIs from current practice to enable better decisions. We will use spatial structure and colors to help the reader to cope with the bigger complexity of the new KPI set.

4.1.5 Time scales


Business planning could be done on very different time scales. However, in real life practice the plan granularity has to be balanced between costs and benefits. It should be also aligned with key financial decision points and it might also express the uncertainty of the forecasts. For the future estimations we propose a variable time scale with 3 different densities: monthly, for the first two years, Financial Models for IMS Based Services 41

Bela Varkonyi

University of Pcs Faculty of Business and Economics MBA Program

quarterly for the next two years, and yearly for the remaining years. For the first two years both a detailed CAPEX and OPEX plan shall be avail-

able. In usual company practice financial controlling is done on a monthly basis. In the current year we would ha ve an approved CAPEX plan with a per month cashflow, and since each summertime we might also have a next year CAPEX plan proposal with a monthly granularity. This corporate planning driven time scale is typically also a good fit for supplier roadmaps. These roadmaps have a very big influence on when a certain investment activity could be started. As we go into the future, supplier roadmaps wo uld be based only on quarters or half- years. After 4 years in time, usually there are no more supplier roadmaps, we could just make vague forecasts, so a yearly time scale would best express the uncertainty of the data. In historical performance data the time scale would be based on the natural reporting unit that is one month. All kind of regression based forecasts would be easier with a fixed unit, so this raw monthly data should be kept for the whole history and quarterly and yearly aggregation shall be added for the whole dataset. However, if we want to compare the historical data with the original plan, a similar hierarchical aggregation and a resulting variable time scale would be extracted than we suggested for future estimates.

4.2 Investment Decision Models


4.2.1 Overview of Evaluation Methods
Before an investment decision is proposed and approved in most cases a detailed financial analysis is required to show if this investment will be profitable. There is a long history of various methods for project evaluation. Most of these methods are based on general company evaluation and each project is treated like a separate virtual company. However, there are some important differences between company and project evaluations. Typically financial accounting is not done in details on a project granularity in telecommunications firms. It is usually more related to the organizational structure and profit or cost centers. There are many company measures that could not be implemented for projects in a reasonable way.

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Bela Varkonyi

University of Pcs Faculty of Business and Economics MBA Program

It is not in our scope to make a detailed comparison of the available project evaluation practices. R ather we will select our choices based on the recommendations of the contemporary financial controlling literature. [Fnagy-rva and Zman 2003] gives an excellent analysis of the evaluation schemes and provides recommendations how to pick up the right method. [Turner 2003a] also adds some practical advices how to decide between DFCF and EVA. Based on these articles and our own experience we propose the following approach to IMS services projects: Discounted Free Cash Flow (DFCF), as included in the Shareholder Value Analys is (SVA) method, for forecasting project profitability of a proposed IMS service; Economic Value Added (EVA) for the current period performance measurement of an active IMS service that could be tied the management incentive schemes; Cash Flow Return on Investment (CFROI) for benchmarking active IMS services. For project portfolio planning we will suggest later a pragmatic method partly based on current practices using multiple key performance indicators (KPI). These KPI values will be determined from the DFCF calculations. It is important to note here that the various cash-flows definitions used in company evaluation could not be used without modifications in project evaluations. In big telecommunications firms the financing decisions are mostly separated from the average size individual projects. So for future investment decisions a lot of components that are dependent on these unforeseen financing decisions cannot be taken into account. In past performance evaluation the situation might be different. The effect of financing schemes could be traced back to the individual projects either directly or indirectly by some cost allocation methods such as Activity Based Costing (ABC). From the 4 major ABC steps summarized in [Gl 2004] the first 3 are already given by the company environment when we study only IMS services. Our scope is here only to provide the necessary measures to do the 4th step of allocating the activity costs back to the products or the underlying projects. The cost drivers are difficult to identify and it is even more difficult to simplify them into a usable model. Some of the general overhead costs could be hidden behind the profit contribution expectaBela Varkonyi 43 Financial Models for IMS Based Services

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tion. This is the usual goal of the technology departments: push out everything from the ABC into this not allocated overhead. The company optimum is somewhere in between: do ABC where the effect is significant and collect smaller costs into a ge neral overhead.

4.2.2 Discounted Free Cash-Flow


It is always one of the most difficult questions what to include in the cashflow of a financial model. Since it is a model only, it should be simpler than the reality, otherwise it is too costly. But if it is too simple, then the decisions might be wrong. A good compromise is necessary. It is also a requirement in a big organization to separate duties and workflows to keep things manageable. Because of this, financing decision shall be separate from the investment decisions as much as possible. If a project is not too big compared to the overall size of the company, then this could be done relatively easily. If a single project has a big impact on the overall results of the company, then we have to take into account the effects of financing to get a proper decision. IMS service projects are not expected to be very big in the near future. So the separation of financing could be assumed based on the Fisher-theorem. The cost of financing is aggregated into the WACC that is used as the calculative interest rate for discounting. That means that the free cash-flow could be computed to the firm and not the equity. It is also important to note that the major goal of the financial modeling is to make proper investment decisions. Ranking is more important than the absolute value of various performance indicators. However, projects are much different in scale, scope, schedules, etc. So comparing them correctly is a critical requirement. Although in textbooks [Brealey and Myers 2003] handling the tax effects is very simple, in real life this could be extremely complicated. Most projects are the same from the tax perspective so adding tax calculations would not really change the ranking among these investment proposals. If there are some special tax benefit programs or other considerations, then we should leave some flexible space for this project specific extra costs or benefits in the calculation schemes. So we suggest not including tax related costs as a standard element into the cost model of the bus iness case. This would also keep our basic principle that financing decisions are separated Financial Models for IMS Based Services 44 Bela Varkonyi

University of Pcs Faculty of Business and Economics MBA Program

mostly from the investment decisions done as part of CAPEX budgeting in big telecommunications companies. It is important to emphasize that the cash- flow in the business case shall include only marginal contributions that are the direct result of the project. On the cost side we have to take into account opportunity costs for a proper analysis, too. The general cost of capital is included in the WACC already, so only such issues shall be taken here for opportunity costs that are project specific. On the other hand, a project might create new opportunities that are significant so they should be added into the calculation. However, these costs and benefits are not cash-flows, so they should be structured as separate corrections in the final NPV calculations using the linear combinational properties of the NPV formulas. IMS services have some special characteristic that influence the components of the cash-flow. There is no inventory build-up, so operative working capital costs cannot be directly connected with an IMS service. The payment schedule and fees collection problems may cause some working capital requirements at the company level, but this does not depend on individual projects normally. On the other hand there could be significant cross-sale and churn control effects of a new or improved IMS service, so revenue and cost components shall be added for these categories. NPV calculations will be done for all cash-flow components in a similar, consistent way. Because a single upfront investment cannot be assumed, all costs in the lifecycle are considered as part of the investment needs based on a present value scheme. So our formulas will be quite different from those someone can find in classical financial textbooks and academic articles. All performance indices (NPV, IRR, PI, etc.) will be adjusted to the time-distributed cost model. Because of the significant progress in computing resources we have no reason to simply spreadsheets to the level of usual textbooks and articles where this simplification is critical for better presentation and understanding. So we determine as many analysis results as possible, and then organize the output of the model such that it would be easy to find and pick what is actually needed by the current reader. So we propose the calculation of three different NPV types: one with WACC, one with a project risk specific rate, and one with a time variable rate. The later could be important in developing regions where financial stability is not as good as in the USA. Most of the literature ignores this problem, since they are based on the US enBela Varkonyi 45 Financial Models for IMS Based Services

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vironment and do not care with the rest of the world. In Hungary, the variable discount rate is mandatory in the public sector for certain projects (61/2005. (VIII. 16.) Korm. r. 1. . (2)), and the Financial Ministry publishes each quarter a new updated 35-year discount rate table on its web site. The various NPV values shall be computed for all possible time periods. The project can be analyzed by a specific point in time just for standalone evaluation and basic filtering. Rolling updates shall be supported too in a common calendar structure. For project comparison and portfolio selection we will normalize the NPV to the beginning of the current business year. We will also provide NFV in a similar pattern. This is useful to evaluate the expected historical performance of the project. The NPV takes out sunken costs, but sometime we want to now the overall performance, but taking into account the time value of money. The NFV is also computed for a specific analysis date and for a normalized calendar point for better comparison. The NFV values will give a better idea to the management how the projects would influence their longer term performance evaluation. The Internal Rate of Return (IRR) is a very popular measure of investment performance [Graham and Harve y, 2001], although it is only related to the return on investment in very special cases you could find only in some classical industries. Using IRR as a dominant guideline for capital budgeting decision might result in serious mistakes, so recent financial literature and common sense engineering thinking suggest not to use it at all as a major factor [Kelleher and MacCormack 2004]. There other misconceptions about IRR [Reinhart 2000], such as the reinvestment assumption, that could be shown not be valid. A Modified IRR could be created [Reinhart 2000], but it is still not really helpful when we separate the financing decisions. We will include IRR calculations into the IMS service model because of its general popularity, but we will strongly emphasize not to u the IRR for anything se else tha n characterizing the financial model for the discount rate sensitivity (as a way to express the stability of the NPV calculation concerning the uncertainties in the applied discount rates, especially the included risk premium). If the IRR is to close or below the used discount rates, then the NPV calculation results shall be treated with special care. Financial Models for IMS Based Services 46 Bela Varkonyi

University of Pcs Faculty of Business and Economics MBA Program

Instead of the IRR, we would push for using the dynamic Profitability Index (PI) as a relative measure of project performance [Ulbert 2002]. The PI calculations are also adjusted for a full PV treatment of time-distributed investment costs. IRR is sometimes also used for computing the CFROI [Tancs and Berze 2001]. In our opinion this is based on the wrong interpretation of IRR. When CFROI is applied to a single IMS service project, then a lot of usual components of CFROI would not apply, so the PI could be the best candidate to satisfy the original definition of CFROI. That means in practice, that for our IMS services projects CFROI benc hmarking should be done with the dynamic PI values. Our ideas are based partly on the expert opinion in [Myers 1996] and [Myers 1997].

4.2.3 Economic Value Added


The Economic Value Added (EVA) methodology is applied mostly to whole firms or business units. [Turner 2003a] describes in details the difficulties of computing the real EVA from the general accounting data or balance sheet of a company. The major idea behind these complex corrections is that only those capital elements shall be counted that are really necessary for operations. When we apply EVA to a project in an incremental manner it could be easier to focus on the real effects of the direct investments. We agree with [Turner 2003a] that EVA is best applied for the evaluation of past performance and it is a good basis for management compensation packages as described in [Turner 2003b]. We also emphasize that EVA distributes the cost of capital unto the whole life-cycle of the investment. Without this creating an efficient management compensation scheme would be difficult, since in the first few years typically the DFCF gives a very high negative value. [Turner 2003a] also explains the relations between the DFCF and EVA methods. If we discount the future expected EVA, then we will derive the Market Value Added (MVA). In an ideal market the MVA is in direct correlation with the difference between market value and invested capital. The total market value of a firm could be estimated by the DFCF. So the DFCF and MVA evaluation are related to each other: Market value (DFCF) = Invested capital + MVA. Theoretically the DFCF and MVA calculations will give the same overall results [Shrieves and Wachowicz 2001]. However, if we use only estimates and if we Bela Varkonyi 47 Financial Models for IMS Based Services

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simplify models for practical use, there could be some slight differences in the actual values. So DFCF and MVA results shall not be compared directly against each other. But if we use them for separate purposes such as DFCF for investment decisions and EVA for performance evaluation, then we will get a consistent management approach despite the small variations in the actual numbers. There are two major methods to compute EVA. One is the capital charge method that is operating with accounting performance indicators such EBIT, tax rate, NOPLAT, etc. The other is the spread method that is based on the difference of ROIC and WACC. In our opinion, the spread method is the best fit for our financial modeling. We could use the future value calculations with historical data, while keeping the same structures as for investment decisions, to determine the NFV of all investments and all revenues. Then we could get the ROIC and since the WACC is already given, we could easily compute the EVA. One of the critical issues is to account only for those assets in the cost section that are really necessary for the given project or service. It is out of our current scope to suggest methods how to reconcile the project or service costs with organizational unit based cost monitoring system. We just notify here that such a scheme would be necessary to avoid having uncovered costs not allocated intentionally either to services or to overhead.

4.2.4 Cost-Benefit Analysis


Cost Benefit Analysis (CBA) is an alternative method to the cash- flow based NPV analysis. Normally, it is used in public sector projects where revenues cannot be identified, but still the investment might be beneficial to the society. It is a recent trend in Hungary to make at least a CBA for any project. This requirement is also enforced by the European Union when someone applies for financial support. The key issue in CBA is to find the major benefit drivers and assign monetary value to these factors. Once this transformation done, the rest of the analysis is almost the same than the DCF scheme. Cost drivers could be also different, since such items might be added that account for environmental damage, or unwanted social effects. It is not always possible to transform each benefit or problem into a monetary value. Or even if it is possible, maybe it is not politically correct (such as the value of Financial Models for IMS Based Services 48 Bela Varkonyi

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human life). So sometimes the CBA method is replaced by Multi-Criteria Analysis (MCA). MCA is usually based on a weighted-average scores evaluation, or in a most sophisticated approach on a multi-dimensional comparison. In the ICT sector a CBA method could be also used theoretically, since there are a number of projects having complex dependencies on other projects. We may also see some environmental or social issues. However, a telecommunications company management is mainly driven by the balance sheet and shareholder value, so financial directors would prefer real cash- flow based calculations. There some situations where revenues cannot be attached directly to an important investments. Such example is the early implementation of an IMS core infrastructure. How to sell a project proposal like this? CBA may come to the rescue, but we would need some good arguments to make the financial people to accept the benefits. A better approach would be real options that we discuss in the next section. In this study our scope is IMS services, where there is a direct relation between the investment needs and the resulting revenues. So in the case the CBA method is not necessary (\we could apply the DCF method), and we would not recommend it to use.

4.2.5 Real Options Analysis


As mentioned in the previous section, there are many investments where at the time of the decision we cannot fully determine the benefits of the project. In recent financial literature a new method emerged that is considered better than the CBA. This is called real options. The name implies that it has something to do with financial market options. The suggested method uses an analogy between financial options and real options, and based on this similarity it reuses the formulas for financial options to calculate the value of real options. Typical examples are based on the staged project model. At specific milestones we have the option to abandon the inve stment (cancel a service), or delay the next stage. This is put into analogy with a call option for a company share. If the real option can be related to a similarly behaving financial market option, then we can determine the value of the real option. This works well for mining, where we can be sure that the deposits could be sold for a reasonable price sooner or later. However,

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in the ICT sector, where software is the major component, it would be difficult to see guarantees for a certain revenue stream. In theoretical studies someone may ignore such problems [Borison 2003], but a financial director does not want to play with real options if they are not appropriate for the case considered. There are alternatives to real options analysis such as decisions trees with assigned probabilities, or Monte-Carlo analysis with market simulation. However, these are far too complex for our current scope. The main driver behind real options is the relative simplicity of the necessary calculations such as the Black-Sholes model. Real options analysis could be used to answer such questions as when to stop a service, when to liquidate assets or sell resources, if it is better to continue a service and utilize a product tail strategy, if we should move resource to another project. In the everyday life of telecommunications companies in Hungary real options is not a preferred tool. In the USA we have seen some examples for real options in telecommunications, but they have long-term market data with large sample sets and relative stability. If a complete hedging is not available for our real project, then [Smith and Nau 1995] for example proposed ways to extend the real options for incomplete or partial markets, but even this requires are lot of reliable and detailed market data. Hungary is more a monopoly or oligopoly market in telecommunications, stock exchange data is not that useful for measuring individual services since major player are not represented on the financial markets, and data sets are small to make good statistical analysis. In Hungary, volatility of the real options cannot be computed only guessed. So we loose the main advantage of real options: replacing guesses with measurements on the financial markets. There is also an image problem of real options. Many financial managers in the ICT sector consider it just a trick to push through otherwise bad projects. Some of them think that the misuse of real options was responsible for the Internet bubble burst. They might have a different opinion if higher risk increases the value of options as stated by many real options fans. Sometimes higher risk means that even smaller revenues cannot be realized, and there is no historical data for value-added

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services illustrating revenues going up quickly. So they consider real options a very dangerous tool that should be avoided if possible. IMS infrastructure as strategic investment could be definitely an object for real options analysis. However, for IMS services in Hungary we suggest not to use real options at the current stage of financial analysis maturity. We will propose simpler means for handling risks. We also recommend organizing projects into smaller chunks where inside the project we do not have options. Regulations or company policy may also limit real options (i.e. we may add up further ADSL subscribers although HSDPA would give a better return on investment).

4.2.6 Scenarios
Uncertainty of business estimates could be expressed by not providing a single expected value in our calculations, but rather providing a limited number of scenarios as part of the standard modeling. Since modeling resources are usually very limited, in most case we would target only 3 basic cases: pessimistic, or slow growth, realistic or moderate growth, optimistic or fast growth. This fits well with most of the fuzzy modeling attempts, since these points are enough to define a fuzzy T -value. However, in real life practice we may not need fuzzy modeling at all, we just want to emphasize the uncertainty of the future estimates by these 3 standard scenarios.

4.3 CAPEX Planning


4.3.1 Project Portfolio Management
CAPEX planning is based on a project portfolio management methodology. The major difficulty is that there could be complex project dependencies by using the same infrastructure and competing for the same resources. We do not aim to solve all issues at once, we propose just to make a smaller step forward and handle projects as independent decision in our IMS services financial model. Our capital budgeting approach keeps the final authority at the human decision maker. All computed KPIs and rankings are just provided as helping information, the software is not allowed to make decisions automatically. This is necessary, Bela Varkonyi 51 Financial Models for IMS Based Services

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because models are never perfect and exceptions are a way of life. However, by including automated suggestion we can better identify exceptions. This would result in better auditing capabilities and a more efficient corporate governance. Our proposed financial model will rank the projects according the NPV of the predicted cash- flows. This maximizes the shareholder value. However, close this major driver we also display the profitability index and present its contribution to the portfolio performance. If the PI is too low, then we mark it for rejection. Similarly we include other KPIs into the CAPEX plan and assist the decision maker by visual signs if a KPI is good or bad. In a future version we will replace the simple NPV ranking with an improved integer programming engine. However, even using this basic capital budgeting tool will be a big cultural shock for decision makers, so we should not hurry too fast. Most capital budgeting models are difficult to handle when the CAPEX schedule is too uncertain. So we propose to divide the original project proposals into stages, where at each stage we are able to decide on abandoning, holding or redesigning the project. The BC shall be created for each stage separately (as an individual project) to simplify the decision process. A project with a BC is either approved or rejected, there are no fuzzy alternatives. It is also an important measure for a telecommunications company how much CAPEX is spent in a business year compared to the overall activities. This ratio is decided strategically and could be easily benchmarked to characterize investment policies. Magyar Telekom for example targets a 15% CAPEX per revenue rate [Magyar Telekom 2006]. When responsible managers make decisions on CAPEX allocation, they have to keep in mind that the project portfolio should support this goal. Because of this strategy requirement it is very useful to compute similar ratios both for the individual projects and for each managed investment portfolio.

4.3.2 Periodic Reviews


Financing decisions are somewhat separated from the investment decisions. However, once a CAPEX plan is approved the financing shall be planned in detail to provide an optimum cash- flow with the minimum costs. Because of this, a reliable short term cash need forecast is essential. However, telecommunications investment projects have a lot of inherent uncertainty. Products and solutions might be delayed, Financial Models for IMS Based Services 52 Bela Varkonyi

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unforeseen problems could pop up in acceptance testing, problem fixing may be longer than planned, etc. This kind of quick changes might put in danger the financing plan execution. Usually there is a big pressure to keep the original cash-flow plan as much as possible by rearranging the project schedules. If some projects are delayed, then probably other projects shall start earlier, purchases would be done sooner. As a result, CAPEX plans are not static, they need regular adjustments. Financial controlling has to monitor tightly how the responsible technical organizations reschedule projects to meet the cash-flow plan. If they do not, then the responsible controller shall step in and enforce action, or escalate to upper management if necessary. On a higher organizational level the remaining changes might cancel the mselves out, but in the worst case they may even amplify. So a quarterly higher level (business unit or company wide) aggregate review is also necessary to be able to make corrective actions in time.

4.3.3 Procurement Controls


CAPEX planning is sometimes difficult since we may not be sure what would be a price of a future equipment or solution purchase. It is a common practice to limit future prices for multiple years with framework agreements. So we can include the price catalogs of such contracts into out financial models. In some case, it is not a simple catalog of list prices. We need some formulas to computer the actual price, too. Usually there is a big difference between licenses for production, test, and development systems. A supply contract may apply some mandatory price erosion schemes derived from inflation, past experience, and bus iness targets. This is always a big fight between giant telecommunications operators and vendors, but if RFQ processes are executed properly, then such procurement controls could work effectively. Procurement also tends to make final decisions on lifecycle TCO instead of the price of the current purchase. This means that our proposed financial modeling tool for IMS services will be used both before the RFQ process with estimates from an RFI or public market prices, through the price negotiation to set targets, and the after the contract made for cost monitoring.

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4.3.4 Savings Campaigns


Another important role of the proposed IMS services financial model is to support CAPEX savings campaigns. It is usual in the current market conditions that investment resources are strategically limited to have nice benchmarking values at the company level. There are some services where customer uptake could be rather volatile, or where the responsible managers intentionally do not plan a budget, kno wing that the option to reject the new subscribers is not real. In this case, the budget has to be revised when financial controlling detects the excess spending in these service areas. The proposed financial models could be utilized in estimating the effect of CAPEX cuts. It gives advices in the CAPEX workbook which project should be abandoned to fulfill the savings requirements.

4.4 OPEX Planning


4.4.1 Service Portfolio Management
OPEX planning starts with assembling existing obligations. The responsible managers scan all valid contracts and add up the numbers. Human resources costs shall be separated (including direct outsourcing). Vendor technical support shall be also grouped together. There is always an overall OPEX budget limit determined by the strategic planning process. OPEX is more critical to performance evaluation of decision makers, since it directly affects the EBIDTA. Because of this, usually there is more emphasis on keeping the OPEX low. It is a basic expectation for supply contracts to include a few years of full guarantee. That may cover all vendor technical support for the first period. Only those OPEX costs would appear for new projects that are not covered by the ve ndor. This requires making an audit check in the financial model not to input vendor related OPEX costs for the first few years. However, we have to provide enough flexibility for special cases, so the guarantee parameters should be changeable.

4.4.2 Enforcing Savings


In the middle of the business year a similar effect could happen that we have already mentioned for the CAPEX budget. Some services generate excess costs, or Financial Models for IMS Based Services 54 Bela Varkonyi

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the company performance lags, so the EBIDTA target might be saved only by reducing OPEX. Even if everything goes fine, the owner could stretch the EBIDTA margins, so costs savings are still necessary. One of the methods for limiting OPEX is to fix the prices of vendor support. This is usually based on nominal prices, so actually in real value there is price erosion. For less capable vendors the operator forces frequent renegotiations of support contract terms. Sometimes the support price depends on the volume or capacity of installed equipment. In such cases, the operator pushes for price saturation, so the costs would not grow linearly when investing more into a platform or infrastructure. The proposed financial models could play in important role in handling OPEX costs savings requests. It is possible to simulate the impact of changing the vendor terms, so we can find out which contract would give the best results.

4.5 Investment Performance Evaluation


4.5.1 Financial Profit-and-Loss Analysis
Ex post financial profit-and-loss (P/L) analysis is usually not done in a project basis. Accounting schemes are in place for organizational units and project portfolios only. This process is fully automated on ERP systems, so we have not too much to do with it. If the MPM is integrated into the ERP system, even a project level calculation is possible. However, in our environment the MPM is not fully integrated with the ERP system, so we would also use the IMS services financial models to generate a profitand- loss report. By utilizing the shifting windows and the NFV formulas it is easy to extract the necessary KPIs for different periods. There is one big problem with the time scales. Investment business cases shall be done with varying intervals, while ex post evaluation is based on monthly accounting data. To make the two comparable we have to provide slightly different worksheets for service performance evaluations.

4.5.2 Economic Value Added Calculations


Besides the usual accounting measures, we have already decided to estimate the economic value added (EVA) for ex post performance evaluation. It is possible to use the financial P/L tables with some extensions to do it. As we have mentioned previously, we would use the spread method and we will provide not just current Bela Varkonyi 55 Financial Models for IMS Based Services

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business year values but also project aggregated with taking into account the time value of money practically calculating the MVA. The implementation of MVA is based on the NFV tables. We also aggregate this for the project (service) portfolio, since this is the more useful measure to be connected to personal incentive programs. We could also compare the ranking of various projects based on the NPV values at the time of CAPEX planning and based on the MVA values at the time of ex post performance evaluation. On the long term these rankings sho uld have some correlation with each other.

4.5.3 Application of Benchmarking


The application of benchmarking requires that we compute those measures that are used by other companies and benchmarking organizations. So have to summarize briefly what KPIs are usually utilized in describing the performance of telecommunications firms. Most of the big telecommunications companies are public, so their financial numbers could be easily analyzed down to a certain detail. On this high level there are some ge neral benchmarks for CAPEX and OPEX budgets: CAPEX per revenue should be somewhere around 10-15%, OPEX might be about three times the CAPEX, Staff costs could be about half of the OPEX. It also a general agreement by experts, that the introduction of IMS/NGN shall reduce the workforce in a former PTT company by 25-40%. This saving could be about 4-9% of the revenue. Significant deviations from the industry benchmarks shall be analyzed and explained. To keep the above values at the company level, we should also check the contribution of each project and take into account when we accept or reject an investment proposal. This leads to a basic requirement to compute CAPEX and OPEX separately. It is also tells us to have the staff (human resources) related costs also summarized. Since a project has typically longer time scales than the annual reports, we have to take into account the time value of money when calculating these KPIs. Costs saving expectations are difficult to map onto individual projects. Usually this is implemented by creating an alternative project plan, where everything would be done continuing with some old technology. Then they compare the two Financial Models for IMS Based Services 56 Bela Varkonyi

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projects and declare that the new technology provides a certain amount of virtual savings. Although business unit leaders like this style of argumentation, financial directors are normally not happy with virtual savings, they would like to see only real savings. Real savings are based on historical data and not on comparing two future predictions. In IMS services historical comparisons would be impossible in most cases. However, if we go up to a project portfolio level this may start making sense. However, such financial modeling activities we leave to the financial controlling department and do not consider as part of our current scope. Another potential benchmarking possibility would be some kind of intensity measures for comparing how much resources we used up for providing an IMS service for a certain amount of subscribers and for a specific level of SLA. Although this kind of data is not available yet for benchmarking, we will put such KPIs into our financial models to keep this option open.

4.6 Proposed Modeling Tools


4.6.1 Available Modeling Tools
In our company SAP is the only available tool for financial engineering besides the Excel worksheets. Cognos, STEM or any other more sophisticated system were not available. None of them could solve our problems as discussed in 3.3.2 Modeling Software. The existing business case models in Excel were not standardized, so practically almost nothing can be reused directly from previous projects. This led us to design the IMS service business case models brand new, only taking into account some basic recommendations from our financial directorate.

4.6.2 Excel Workbook Requirements


In this section we summarize the major requirements that we took into account when designing the Excel workbooks for our IMS service models. The interested reader may find further details in the Appendices. An IMS service business case model shall be composed by modular worksheets that guide the workflow of the necessary analysis steps and provide the needed structure for proper access controls. It is important to support transparency with well designed scorecards and graphical presentations. Peer-to-peer review and consensus Bela Varkonyi 57 Financial Models for IMS Based Services

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finding is an efficient tool for improving the reliability of predictions and mitigating potential cheating or fraud. All worksheets shall be organized such that financial data could not be entered by non- financial departments. They should only use natural measures for input data. All financial values will be calculated automatically or modeled by a professional financial analyst. Each workbook shall include a RACI and a CRUD list that would match with the officially approved process modeling system (e.g. ARIS). The natural measure inputs shall checked graphically against product cycle experiences. The worksheets must include a mandatory revenue breakdown structure to facilitate easier comparisons with other projects or historical data. It should also describe revenues in terms of major market segments. As a minimum: retail and bus iness customers shall be separated. The worksheets must include a mandatory cost breakdown structure for similar reasons to the revenue breakdown. Costs must be grouped into two major categories: CAPEX (capital expenditure) and OPEX (operational expenditure). CAPEX would include such items as technology acquis ition costs paid to vendors, internal implementation and system integration costs, project management human resources costs derived from the MPM time sheet reporting system. Everything else should be added here, that would become part of the asset activation in the accounting system. OPEX covers such technology implementation related cost factors as vendor technical support, training, human resources for service operations, leasing of underlying infrastructure, energy and cooling, data center renting, and spare buffers for fixing unforeseen problems. OPEX shall also cover business implementation related cost factors related to marketing, sales, customer relationships. The major items would include customer acquisition, marketing campaigns, churn, customer termination, sales costs, customer care and provisioning costs, etc. The project business case evaluation summary sheets shall be supported by graphical charts helping to interpret the various values on the scorecard. Internal financial calculations should be also presented through graphical means. This would give some tools to both the analyst and the auditor to detect errors. NPV tables might have a NPV/discount rate profile displayed in graphical form, where the various inFinancial Models for IMS Based Services 58 Bela Varkonyi

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terest rates could be marked. This would help to handle the IRR correctly as a sens itivity measure instead of a return on investment KPI.

4.6.3 Software Technology Requirements


All the Excel sheets must avoid the usage of VBA code, since these tables will be used by non-programmers, and big VBA libraries would totally destroy the goal of transparency for all stakeholders. In our Excel workbooks even the usually hidden global variables might be found easily, since they are just normal cells. Not using VBA code requires a move away from classical procedural programming as used in almost every financial modeling spreadsheet we could study (either taught by textbooks or sold as commercial tools). We have to build upon the principles of functional programming (like LISP), and finite recursions, even for matrices, with head-and-tail traversal. Our design goal is to handle a maximum of few hundred projects in the capital budgeting portfolio, so Excel tables could accommodate the number of items. We rely on the exponentially growing memory and CPU capacities to enable a literate programming style, where we always focus on the clarity of the calculation for other human beings. We leave to optimization to the Excel platform. By using functional programming we also let the underlying software to decide on how to make parallel threads in the computation. Since multi-core processors are quick becoming the norm, we should not worry too much about suboptimal algorithms. However, by using more auxiliary cells for interim calculations we could even easily optimize the CPU usage, too. Memory is very cheap indeed, so we do not try to spare with it. Another new requirement, compared to older Excel models, is the intensive use of colors, fonts, and graphics to guide the human reader. In many cases, Excel worksheets has to be printed, so for a long time the laser printer limitations discouraged the use of these features. Everything had to be designed for black-and-white. Today we have cheap color printing (even in A3 size) and huge 24- inch color monitors at a very affordable price. So we have no reason to stick to the old outdated limitations.

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4.6.4 Reference Implementation


We have attached a reference implementation of our IMS services financial modeling concept. It includes Excel templates for project evaluation and budgeting. The templates are also used for illustrative examples in IMS service projects discussed in more details in the next chapter. All the data used in the examples are synthetic and not based on actual values of any operators. The goal of the examples is to demonstrate the usage of the modeling tool and not to give real life profitability analysis. Each workbook follows a similar architecture. One sheet is used to summarize the results of the calculations for peer-to-peer review. Separate sheets are used for inputs and outputs. The rest of the sheets are used for calculations and modeling. In the NPV calculations we use separate lines for the discount factor making recursive formulas easier to handle. We use a fix calendar for each project, but with a shifting window based on the actual analysis date entered as an input. The milestones of the product cycle are taking into account in the self-auditing tools, so no one could enter revenues before the service is launched, and no one could add costs once the service is terminated and all equipment is impaired. The major NPV and NFV analysis tables have a variable time scale at the top. However, for many purposed we need equally spaced timelines, too. So we added auxiliary table at the bottom to generate for example controlling charts. In sensitivity analysis we use the dynamic chart concept [Holden 2007] to display the KPIs as we change the input parameters. In each template there is an explanation of color coding. Wherever it was appropriate we included some self-auditing features. It is the assigned maintainers responsibility to fix all auditing problems before passing the file further in the workflow. The interested reader should refer to the Appendices for further information on how we implemented the requirements described in previous sections.

4.6.5 Modeling workflow


The Excel models shall be organized according to data ownership, or revenue and costs responsibilities.

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First of all the general market scenario descriptions shall be composed including the analysis of value proposals and market segments. Based on this a market forecast shall be assembled in Excel format. This shall be expressed in such measures that could be charged in the underlying technology. We also have to determine the various service components of the project. The traffic calculations shall be crosschecked by the technology experts, but the accountability must stay with the marketing or business development departments. After this the pricing policies could be determined. In real life the price bundles might be extremely complex, so usually in financial modeling we have to make some compromised and use some type of average values and simplified schemes. Based on the proposed prices we transform the forecasted traffic into estimated revenues. The revenue responsibility shall be at the business side, technology has only the role to assist in having a proper rating simulation. The next step is to calculate the major resource needs to implement the proposed service. This is primarily in the domain of the technology departments. The cost estimates shall be based on capacity numbers determined from the marketing traffic forecasts. In most cases the supplier prices are fixed by longer term contracts, sometimes even a price erosion formula could be added in the field of IMS services. Usually the first few years of vendor technical support costs could be covered by a guarantee, so OPEX could be relatively low while the service is just taking up. Sometimes vendor pricing is based on a revenue sharing model. However, one of the financial goals of migrating to IMS/NGN is to get rid of this scheme as much as possible and force the supplier into a cost based pricing policy. Other general operational costs, such as marketing, sales, administration, etc. could be added based on some historical activity-based costing schemes probably by the business development or the financial controlling department. The modeling workflow is summarized in Figure 4-3. The input data tables from various departments are organized into separate workbooks for easier access control. One workbook combines these inputs into a financial business case model. This investment project plan file is maintained by the financial controlling department.

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Figure 4-3. Modeling workflow overview


Service feasibility study

Start modeling

Business Development

Analyze market

Market forecast Usage estimates

Forecast traffic

Establish pricing

Pricing policy

Traffic?

Design technology Technology Identify resources

Technology resources

Plan capacities

Traffic?

Vendor price catalog

Procurement

Apply vendor prices

Controlling

Assemble business case

Revenues Costs

Financial policies Business Case Send to portfolio planning

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5 Application of Financial Models for IMS Services


5.1 General Templates for IMS Services
We have attached on the accompanying CD some illustrative examples how our new Excel business models could be used for making better founded decision on investment proposals for new IMS services. In the next few sections we briefly explain the underlying market situation and emphasize the special features of each case. Each example business case is organized as a new project under consideration for the annual CAPEX budgeting process. Each project has its own Excel workbooks, and the results are fed into the CAPEX planning workbook. In the attached examples for IMS services we also demonstrate how to take into account the specific features and the technology architecture. The breakdown structure for each type of service extends the common project templates. Once we want to fill these worksheets with real life data, we would benefit from this embedded expert knowledge. The attached examples are just illustrating the usage of the Excel tools and cannot be considered as a real life scenario analysis for any real product. For further details the interested read shall refer to the Appendices.

5.2 Video sharing


The very first demonstration of IMS services was peer-to-peer video sharing from Nokia. Almost all N and E series phones have this function embedded. It is a very primitive service, since it is based on the information stored in the local address book and do not require any AS on top of the IMS core [Figure 5-1]. First a CS voice session is opened using a phone number from the CS domain. While talking on this connection a parallel IMS session could be opened for video sharing using another phone number from the PS domain. In contrast, the Ericsson weShare solution is based on an AS architecture that requires a downloadable client and is not supported by embedded terminal software. In our business case example for video sharing we illustrate a costs and revenue breakdown structure for the Nokia peer-to-peer approach. Our estimates are based on the announcements of video sharing from TMN Portugal, TIM Italy, and AT&T Wir eless USA.

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Figure 5-1. Video sharing architecture

PLMN PLMN IMS Core IMS Core 5 6 4 2

7 8

5.3 Presence and network address book


Presence is mainly an enabler for instant messaging applications in the Internet. It is used to indicate of someone is willing to take part in a chat. In classical telephony the availability of the partner is only checked at call setup time, and if there are some problems with it, we will get back various tones. Redirecting unsuccessful calls to a voice mail system became its own market called call completion services. A recent example is the notification SMS sent about missed calls in mobile networks. Presence in IMS is taking over the classical instant messaging idea and extends it to all session based services. The OMA XML Document Management Server (XDMS) enabler is used to manage the information database behind the presence services. Presence in most cases implemented together with group and list management, or OMA resource list server (RLS) features on the same server, although logically they are not strongly related [Figure 5-2]. As we later describe it presence is a critical underlying service for instant messaging, push-to-talk, next- generation t e lephony, and combinational services. It could be utilized as a standalone service, too, just for communicating important informatio n without any further integration. Presence as a standalone service already requires a maintenance of user data, so adding a network based address book is very natural. Once we have this directory, further ex-

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tension by group and list management is also a good idea. This leads to a full XDMS enabler implementation. The big issue is with presence that it can generate a lot of traffic if not controlled properly. If a customer wants to have real- time status information for tho usands of items on a large buddy list, then it will generate a huge amount of traffic depending on the method of status updates. Of course, the operator wants to get a compensation for this resource usage, while the customer does not to pay for it. Vendors are still struggling to find out a compromise to make large scale commercial launch possible. Figure 5-2. Presence architecture
2 6 Network Address Book 5 Presence AS 7

XDMS

IMS Core IMS Core 4 3 8 1 A B

In our example business case for the presence service we assume a full ne twork address book extension with group and list management included. We provide a detailed structure for the typical cost elements and for the possible rating schemes. Our modeling worksheets enable the designer to check the effect of fine tuning the information sync hronization parameters.

5.4 Instant messaging


Instant messaging is not a new service. It is already well established globally on the Internet and also getting a widespread acceptance on mobile phones in USA [Walton, 2007]. There are multiple competing technolo gies, such as Web based, XMPP, OMA IMPS (Wireless Village), pure SIP/SIMPE, and IMS SIP/SIMPLE [Figure 5-3] or session-based.

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One of the biggest problems with instant messaging that it could take away revenue from SMS and thus a lot of operators are reluctant to introduce or endorse. However, the big Internet players (Google, Yahoo, MSN, etc.) are moving into the mobile phones through both the handset vendors and some other operators. According to [Walton 2007] in Europe the GSMA preferred Personal Instant Messaging (PIM) solution will be preferred, and in many case marketed as a natural continuation of SMS under the name of SMS+. Figure 5-3. IMS PIM architecture (SIMPLE)

3 Network Address Book OMA Presence AS 2

PIM Instant Messaging AS 4

XDMS

IMS Core IMS Core 1 5

The future of IMS based personal instant messaging is quite uncertain, although instant messaging in general is clearly the future. This is because the IMS based IM is little bit late in the market and the others are already so well established, that it would be difficult to replace them. However, there are a lot extra features of IMS based IM that would make it more attractive and give it a chance. It could reuse both the IMS infrastructure and the common XDMS enablers, so marginal costs could be minimal on the server side. It may have a lot synergy effects with other applications such as push-to-talk, general network based address book, location based services, mobile portals, m-commerce, and combinational services with classical telecommunications resources. The mobile operator could also leverage its bran and special customer relations. The biggest deal in instant messaging is network address based, presence enabled new graphical user interface (GUI). It is believed by many in the industry, that this will be the only surviving user interface in the near future. Every multimedia Financial Models for IMS Based Services 66 Bela Varkonyi

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communications, even simple phone calls, would be started from this single integrated GUI. Using this integration to full extent is available only for mobile operators, so probably they could win back some lost market share if they stop hesitating and start rolling out IMS based instant messaging finally. According to the latest roadmaps of handset vendors the first commercial grade embedded multimedia instant messaging clients will be available in the first half of 2008. In our opinion, this would not be good enough to handle all legal and regulatory problems with mana ging personal information properly, so the earliest commercial launch would be most likely delayed to the Christmas season of 2008. The blocking factor of handset problems for instant messaging is not serious as with other IMS services, since the majority of currently used handsets are already equipped with Wireless Village clients, and IMS based instant messaging could be made backward compatible with these clients. Embedded clients are thus much easier to find for instant messaging. As [Figure 5-4] illustrates the downloadable clients will be not very popular with operators, since the logistic and servicing of customer installed clients is very difficult. Ignoring the pre-IMS Wireless Village clients could be a big mistake, even if we opt for an IMS based instant messaging vision. It is possible to introduce two types of services: a premium service with more capable IMS terminals, and a normal service with old IMPS clients, but all within the same community and providing a smooth migration. This can be even extended with a mobile portal based access, too. Of course, text based chatting is not really new or sexy, but having a community established, and adding multimedia session capabilities through the IMS clients give a clear advantage to those who could not afford to utilize IMS. Another big opportunity is to link into existing social network sites. For example, Magyar Telekom owns already iWIW, the bigger Hungarian community site. If they could create some synergy between iWIW and the instant messaging service, then it would give a big incentive for the customers to prefer the T-Mobile instant messaging service.

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Figure 5-4. IM client enabled handsets forecast

These changes in technology and marketing initiatives mean that we are just in time for creating new investment business cases for IMS based personal instant messaging. Our example Excel workbook illustrates that effect of infrastructure reuse. Here the specialty is that besides the IMS core, the XDMS enablers (presence, group and list management) is also an important factor in the calculations. If we have excess capacity in these components, then marginal costs could very low. If we need to go to the next capacity level in the enablers just because of this service, then cost would go significantly higher, but still better then with vertical silos, since most of the integration costs could be still spared. Our pricing models are based on the corridor of mass method [Kim and Mauborgne 2005]. This is a significant change form the current European or Hungarian practice. However, if we look at the policies of T-Mobile USA, they use to the extreme: each message have the same price, independent of the technology (SMS, MMS, e-mail, IM). This pushes usage to the more innovative, newer, and cheaper to operate solution, with causing any problem for the user in the migration process. In the uptake curve estimation we use the data from [Walton 2007] with some corrections based on our own experience.

5.5 Push-to-talk
Push-to-talk is a half-duplex voice service for peer-to-peer and group-based communications similar to a walkie-talkie radio, but using normal mobile phone and the mobile network. Basically, it would work even on GPRS, but when users really pick it up, the network might crash. It became very popular in the USA and failed Financial Models for IMS Based Services 68 Bela Varkonyi

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miserable i Europe [Mavrakis and Kamal-Saadi 2006]. In the USA it was used n originally because of the lack of SMS services. Figure 5-5. IMS OMA PoC architecture

3 Network Address Book OMA Presence AS 2

OMA Pushto-talk AS

XDMS 4

IMS Core IMS Core 1 6 5 7

The early adopters in Europe, such as T -Mobile, have a difficult time now with the first generation of Push-to-talk Over Cellular (PoC). Although the PoC ve ndors prepared for IMS based solution in 2005, the lack of IMS infrastructure and proper IMS terminals moved them into pre-IMS proprietary solutions. The most characteristics example is the Nokia PoC offering. Both the servers and the clients are proprietary, and only a small number of handsets could be used, and the service enablers are organized into a vertical silo, totally in contradiction to the IMS concept. It also required a dedicated APN, so no other IP based services could be used in parallel with PoC. This is a big marketing issue, since PoC alone is not so attractive than as a part of multi-service bundle. There were also a lot of other problems with the marketing strategy of PoC. So the costs skyrocketed, and the revenues did not come, a total disaster was happening. Termination of PoC services is in the air, and some disgruntled high-profile customers will generate a significant churn in the near future. [Mavrakis and Kamal-Saadi 2006] forecasts that probably a new start will happen once OMA PoC compatible solutions could be deployed. We agree fully, that the new IMS based OMA PoC [Figure 5-5] would look much better in the business case. However, the previous failure will make deciding managers very cautious, so the financial investment calculations will be challenged strongly. We also have to Bela Varkonyi 69 Financial Models for IMS Based Services

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note that PoC could evolve into a Push-to-anything service [Figure 5-6] that gives a much bigger marketing potential with only adding some software updates to the PoC clients and the PoC AS. Figure 5-6. Push-to-anything roadmap forecast

What would be the big difference in our new PoC business case proposal? There are a lot of significant cost savings: no need for extra SIP proxy, no need for dedicated group and list management, no need for a very expensive charging system, just a small little application server on top of the existing IMS infrastructure. The only problem is the push by the vendor for recovering the lost revenues with the previous supply. But if we ignore Nokia and go with smaller vendors, then we could easily put together a one magnitude (!) cheaper solution. The blocking factor currently is the lack of IMS OMA PoC capable terminals. Nokia is still putting proprietary clients into their phones that could work over IMS, but not with an OMA PoC AS. Currently, up to 10% of the customer terminals are Nokia PoC enabled in Hungary, but it is very risky to go with a Nokia terminal only marketing strategy. So we have to wait another 1-2 years before we could even think launching IMS based OMA standard PoC again on a larger scale. And then comes the last, but most important question: is it possible that instant messaging with presence could kill PoC altogether? Our example PoC business case demonstrates the advantages of the IMS philosophy. The major cost driver is the OMA PoC terminal and the OMA PoC application server licenses. Server hardware costs are relatively small, and integration costs Financial Models for IMS Based Services 70 Bela Varkonyi

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are kept to a minimum. We propose a significant change in the pricing policy based on the corridor of the mass strategy [Kim and Mauborgne 2005]. We definitely need lower prices than we had with the first pre-IMS PoC introduction. We can estimate from the business model how many subscribers we need for becoming profitable. This makes it much easier to control the marketing effort and establish a gradual introduction to the market with a lot of control points where we can manager the inherent risks.

5.6 Presence based IP telephony (voice and video)


The original focus of IMS development for UMTS Release 5 focused on replacing the basic voice telepho ny service with a packet-switched version. As it turned out this was not very attractive, especially that Release 4 solutions were priced very competitively. No marketing manager could be convinced by an IMS based pure voice over IP services. They do not see any advantage of doing it, while the voice telephony ARPU is declining 10-20% each year [Merry 2007]. They are struggling to find new revenue sources instead of accelerating the price erosion further by endorsing VoIP. Some operators even tried to filter out Skype and other independent VoIP players and modified the service contract to disallow mobile VoIP at all. In many countries this is against the regulations, so they introduced an artificial jitter practically rendering the concurrent services useless. This is a never ending game, so probably it would better to make different product, that does something much better then independent VoIP providers could do. We propose one possible way out of this problem. IMS based telephony should be a flexible multimedia offering with rate adaptation and presence built in [Figure 5-7]. It should open the call control rules to the customer through a self-care interface that is accessible by the Web, WAP, and some function even with in- line signaling. The user could setup rules how to process incoming calls for multiple identities and multiple terminals, and the rules might take into account calendars and time schedules, too. It is also a basic proposition to have this service on any access technology, only full FMC solutions have a chance in the future. Converged operators have another advantage of providing a smooth migration path from CS to PS domain in both the fixed and the mobile networks. These companies are installing such service delivery platforms (SDP) that may control from Bela Varkonyi 71 Financial Models for IMS Based Services

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the same application both the CS and PS telephony service. One example in Hungary is the T -Mobile Telematrix solution. By default, rerouting CS calls while the call setup is in progress is not available for independent VoIP providers, they have to become a full classical telecommunication company to be able to do this. Figure 5-7. IMS presence based telephony architecture
3 Network Address Book 2 OMA Presence AS

4 7

IP Telephony AS

XDMS 8 Selfcare

IMS Core 6 1 5 A B 10 IMS Core 9 11

One missing technology is a standardized Voice Call Continuity (VCC) solution [Merry 2007], but this might be finished in 2007, so in the near future this blocking factor will be eliminated. Another problem is the lack of QoS support in the PD domain implementations. This may need another 2-3 years to be solved. Yet another issue is the lack of commercial grade IMS multimedia telephony clients. Nokia already deployed a basic IMS voice telephony client in all of their N and E series phones. In 2008 we expect that Nokia will release a video telephony component and other vendors will also follow with full presence enabled multimedia IMS phones. Our IP telephony business case example takes into account these requir ements and guides through these special elements in estimating the costs. The uptake of the service reflects the fact that although the priced will further erode, the minutes of usage (MOU) still have some space to grow.

5.7 Mashup services


One of the new trends in the Web services spaces is to provide the user a special portal where she can mix up existing services with new service to create a complex combination of many different elements. These user controlled combinational Financial Models for IMS Based Services 72 Bela Varkonyi

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services are called mashup and recently becoming almost as trendy as the Web 2.0 mark. One of the first examples was opening up Google Earth as a mashup platform. A similar, but more classical approach is called OSA-Parlay. This provides a standard API for accessing all telecommunications services independent of the underlying vendor specific solutions. It has a Web service variant called Parlay-X that extends with the necessary security control and charging elements to open up the telecommunications network to third-party developers. With the latest SDP platforms the CS and PS domain services could be accessed through a single interface. There is a huge untapped potential for telecommunications companies to open up their whole infrastructure even to individual customers through a mashup portal. The challenges are big in security and charging, but if we could solve these, then the users would get a revolutionary new experience. Because IMS unifies the underlying security and charging components, now we have a chance to have an efficient pla tform to support mashup services. For example, Microsoft and AT&T have already shown public trials for these combinational solutions using the Microsoft Connected Service Framework (CSF) and the Ubiquity IMS AS gateway [Mavrakis and KamalSaadi 2006]. Commercial rollouts are expected in 2008. Mashup portals could be used to test new product ideas. Simple user assembled solutions might not scale to a large number of users, but professional programmer resources can be focused on already proven services. A new combinational service will start on a mashup portal, then it may move to the operator SDP, and if scales up to millions of user then it would be transformed into a dedicated IMS AS. Mashup technology will change how services are developed and launched. It will become similar to an evolution and less disruptive as the typical pattern today. Our example business case for a mashup service platform illustrates the advantages of combinational services. We provide guidance for correctly taking into account all important cost drivers.

6 Summary
6.1 Current Practice in IMS Financial Modeling
Financial modeling of new services is usually done with Excel spreadsheets at big telecommunications companies. The main reason is the flexibility of worksheets. However, there are problems with transparency, peer-to-peer review, consisBela Varkonyi 73 Financial Models for IMS Based Services

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tency, and reliability of the estimates. The models are used mainly for filtering, actual capital budgeting decisions and preferences are not really influenced by these models. This creates a negative feedback, so they try to minimize the efforts to make these business case calcula tions better. From the technology departments this whole process appears as a blocking factor that should be circumvented as much as possible. The focus is on creating alibis and protection against auditing and not a real support for improved decision making. These problems do not cause real business issues until the market is growing quickly and errors and suboptimal decisions would not stop the overall success of the company. However, as of today there are important signs of market saturation and possible declines in critical revenue streams, so we should try to change the current approaches and transform the business case tool into a really useful helping hand for decision makers.

6.2 Proposed Financial Modeling Solution


We have proposed a significantly improved way of creating new business case calculations for planned IMS services. It is based on consistent, easier to understand templates that facilitate transparency and peer-to-peer review thus making the estimates less uncertain. We ha ve illustrated the usage of these templates on some new IMS service examples and a capital budgeting decision organizing workbook. We have also demonstrated the advantage of applying modern software development paradigms such as self-auditing and functiona l programming. We have also analyzed what performance indicators should be used in evaluating the investment business cases. In contrary to the current practice, we have suggested to put more emphasis on the profitability index (PI) and give a different interpretation to the IRR. In the modeling tools we took care about taking into consideration other than pure financial aspects in CAPEX and OPEX budget allocation decisions not to limit the flexibility of the responsible manager. However, the new solution guides the decision maker to better decisions by inducing a careful review for those items where the final decision differs from the suggestion given by the financial modeling. Our proposed modeling tool also manages such problems as normalizing different time-scale projects for comparison, or the issue of sunken costs contradictions Financial Models for IMS Based Services 74 Bela Varkonyi

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between investment decisions and past performance evaluations. We have maintained a financial scorecard for each project that is based on more dime nsions than used before. This may further improve making informed decisions and reduce inconsistencies in the project portfolio. We have included various KPIs into our financial models that could be used in the future for benchmarking the efficiency of service development and operations activities.

6.3 Further Study


There are a lot of possible ways to further study the modeling problems and improve on the modeling tools. Here we just emphasize the most promising directions: Creating business models for each IMS service using the business model ontology and tools by [Osterwalder 2004], and then aligning our financial modeling tools with these business models; Extending the business case templates for evaluating real options with proper controls that cross-check the validity of the assumptions and avoid assigning too much value too a real option; Improving the suggestions for budget allocation with integer programming; Applying the latest results in fuzzy modeling for handling the uncertainties of the estimates in a better way [Carlsson and Fuller 1999]; Integrating the Excel tools with the ERP environment and the teamwork supporting portals and automating the whole annual CAPEX and OPEX management process; Migrating proven models out from Excel into more scalable commercial business simulation tools (using the spreadsheets as prototypes for the final solutions). We should also investigate in the next few years if the investment suggestions provided by our modeling tools were justified by the real life movements of the ICT market. Interesting and challenging times are before us

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7 References
3G Americas (2006): Mobile Broadband: The Global Evolution of UMTS/HSPA, 3GPP Release 7 and Beyond. Bellevue, Washington, USA: 3G Americas, 2006.12.14. White paper. (Downloaded on 2007.09.15.) 3G Americas (2007): UMTS Evolution from 3GPP Release 7 to Release 8 HSPA and SAE/LTE. Bellevue, Washington, USA: 3G Americas, July 2007. White paper. http://3gamericas.com/PDFs/WP_3GA_UMTSRel8_July07.pdf (Downloaded on 2007.09.15.) Akhavan, Amid et al. (2006): Next Generation Mobile Networks, Beyond HSPA & EVDO. NGMN Ltd. White Paper. v3.0, 5 December 2006. Bailey, Robin (2006): STEM case studies, Adding data revenues in transition from GSM to UMTS. = ITU/BDT Regional Seminar on Mobile and Fixed Wireless Access for Broadband Applications for the Arab Region. 22 June 2006, Algiers. Br, Zoltn (1999): Az operatv controlling elszmolsi rendszernek kialaktsa. In: Gyakorlati Controlling, 6/4.3. Budapest: RAABE 2005. 2. tdolgozott kiads. ISBN 963-85920-5-2. (in Hungarian language) Br, Zoltn; Nagyn Sfr, Mria; and Urbn, Rozlia (2000): Az ves gazdasgi tervezs mint az operatv controlling egyik fo funkcija. In: Gyakorlati Controlling, 6/4.5. Budapest: RAABE 2005. 2. tdolgozott kiads. ISBN 963-85920-5-2. (in Hungarian language) Borison, Adam (2003): Real Options Analysis: Where are the Emperors Clothes? = Real Options Conference, Washington, DC, July 2003. http://ardent.mit.edu/real_options/RO_current_lectures/borison.pdf Brealey, Richard A. and Myers, Stewart C. (2003): Principles of Corporate Finance, 7/e. New York, USA: McGraw-Hill Higher Education. ISBN 0072467665. Carlsson, Christer and Fuller, Robert (1999): Capital budgeting problems with fuzzy cash flows. = Mathware and Soft Computing, 6(1999) 81-89. p.

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Ehrhardt, Michael C. and Wachowicz, John M. (2006): Capital Budgeting and Initial Cash Outlay (ICO) Uncertainty. = Financial Decisions, Vol. 18 (2), Summer 2006, Article 2. http://www.financialdecisionsonline.org/current/EhrhardtWachowicz.pdf (Downloaded on 2007.09.15.) Ehrhardt, Michael C. and Wachowicz, John M. (2007): Form Follows Function: The Appropriate Definition of Free Cash Flow. = Journal of Financial and Economic Practice, Vol. 7:2 (Spring 2007), 18-37. p. http://www.bradley.edu/fcba/undergraduate/finance/jfep/Site/SP07.html (Downloaded on 2007.09.15.) Fnagy-rva, Pter and Zman, Zoltn (2003): A vezetoi szmvitelen alapul vllalati rtkmrsi mdszerek sszevetse a stratgiai controlling gyakorlatban. In: Gyakorlati Controlling, 4/9. Budapest: RAABE 2005. 2. tdolgozott kiads. ISBN 963-85920-5-2. (in Hungarian language) Fnagy-rva, Pter and Zman, Zoltn (2005): A tulajdonosi rtk mrse a Magyarorszgon mukdo vllakozsok gyakorlatban. In: Gyakorlati Controlling, 4/14. Budapest: RAABE 2005. 2. tdolgozott kiads. ISBN 96385920-5-2. (in Hungarian language) Gl, Joln (2004): A tevkenysg alap kltsgszmts (Activity Based Costing, ABC) elmlete s gyakorlati megvalstsnak lehetosge egy termelo vllalkozsnl. In: Gyakorlati Controlling, 6/4.12. Budapest: RAABE 2005. 2. tdolgozott kiads. ISBN 963-85920-5-2. (in Hungarian langua ge) Graham, John R. and Harvey, Campbell R. (2001): The Theory and Practice of Corporate Finance: Evidence from the Field. = Journal of Financial Economics, Vol. 60 (2001) 187-243. p. http://faculty.fuqua.duke.edu/~charvey/Research/Published_Papers/P67_Th e_theory_and.pdf (Downloaded on 2007.09.15.) Holden, Craig W. (2007): Excel Modeling How to Build Financial Models In Excel. http://www.spreadsheetmodeling.com/ (Downloaded on 2007.09.15.) Jaffe, Jeff (2004): Fundamental change in telecommunications architectures and platforms. Piscataway, NJ, USA: Rutgers, Center for Advanced Info rmation Processing. Keynote Address, CAIP Annual Research Review 2004.

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http://www.caip.rutgers.edu/news/AR2004/Jeff%20Jaffe%20presentation% 20slides.ppt (Downloaded on 2007.09.15.) Johnston, David (2000): The Reverse Sunk Cost Effect And Explanations, Rational And Irrational. = 5th Conference, Alternative Perspectives on Finance and Accounting, University of Dundee, 23-25 July, 2000. http://www.departments.bucknell.edu/management/apfa/Dundee%20Papers /17Johnstone.pdf Kelleher, John C. and MacCormack, Justin J. (2004): Internal rate of return: A cautionary tale. = The McKinsey Quarterly. Web exclusive, August 2004. http://www.mckinseyquarterly.com/Corporate_Finance/Valuation/Internal_ rate_of_return_A_cautionary_tale_1481 Kim, W. Chan and Mauborgne, Renee (2005): Blue Ocean Strategy. How to Create Uncontested Market Space and Make the Competition Irrelevant. Boston: Harvard Business Press, 2005. ISBN 1591396190. Lancz, Gabriella (2006): Business Case beruhzsi dntsek eloksztse. In: Controllingtrendek, 11/2. Budapest: RAABE 2006. 1 kiads. ISBN 9639600-10-5. (Hungarian language) Magyar Telekom (2006): Presentation. Full year 2006 results. http://www.magyartelekom.hu/english/doc/full_year_2006_results.pdf (Downloaded on 2007.09.15.) Mauboussin, Michael J. and Hiler, Bob (1998): On The Shoulders of Giants, Mental Models for the New Millenium. Credit Suisse First Boston Corp. USA. http://www.capatcolumbia.com/Articles/FoStrategy/Fos2.pdf (Downloaded on 2007.09.08.) Mavrakis, Dimitris and Kamal-Saadi, Malik (2006): IMS Opportunities and Challenges: Fixed and wireless market outlook. London, UK : Informa Telecoms & Media. Mszros, Jnos (2005): Szolgltatscontrolling. In: Gyakorlati Controlling, 8/19. Budapest: RAABE 2005. 2. tdolgozott kiads. ISBN 963-85920-5-2. (in Hungarian language) Merry, Paul (2007): Fixed Mobile Convergence: Evolving Business Strategies and Market Trends; 2nd Edition. London, UK: Informa Telecoms & Media.

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Myers, Randy (1996): Metric Wars. = CFO Magazine, October 1996. http://www.merage.uci.edu/~jwallace/METRIC WARS.doc (Downloaded on 2007.09.15.) Myers, Randy (1997): Measure for Measure. = CFO Magazine, November 1997. http://www.cfo.com/article.cfm/2990607/c_3046567?f=singlepage (Downloaded on 2007.09.15.) Nemeslaki, Andrs (2006): Projektcontrolling: A Megtermelt rtk Elemzs alkalmazsa. In: Controllingtrendek, 8/1. Budapest: RAABE 2006. 1 kiads. ISBN 963-9600-10-5. (in Hungarian language) Osterwalder, Alexander (2004): The Business Model Ontology - a proposition in a design science approach. Lausanne, Switzerland: UNIL HEC. PhD Dissertation. http://www.hec.unil.ch/aosterwa/PhD/Osterwalder_PhD_BM_Ontology.pdf Osterwalder, Alexander (2007a): 2 Day Workshop on Business Model Design. Arvetica Presentation. Tecnologico de Monterrey, Guadalajara, Mexico, June 7-8, 2007. http://www.slideshare.net/Alex.Osterwalder/2-dayworkshop-on-business- model-design/ Osterwalder, Alexander (2007b): Management2.0: Competitive Advantage through Business Model Design & Innovation. Arvetica Presentation. Guadalajara, June 2007. http://www.slideshare.net/Alex.Osterwalder/management20-competitiveadvantage-through-business-model-design- innovation/ Osterwalder, Alexander (2007c): Your Business Model: how to identify and improve it. Arvetica Presentation. La Trobe University, Melbourne, July 2007. http://www.slideshare.net/Alex.Osterwalder/40- minutes-on-businessmodel- innovation/ Partridge, Brian (2006): Standards-Based Communications Servers for Telecommunications: Market Drivers, Inhibitors, Perceptions and Rankings. Boston, MA, USA: Yankee Group, Jan. 2006. Communications Network Infrastructure Report. Reinhart, Walter J. (2000): Capital Budgeting and The Reinvestment Assumption. = Alternative Perspectives on Finance Fifth Biennial Conference, Dundee, Scotland. July 23 25, 2000. Financial Models for IMS Based Services IV Bela Varkonyi

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Rysavy Research and 3G Americas (2007): EDGE, HSPA, LTE: The Mobile Broadband Advantage. Bellevue, Washington, USA: 3G Americas, September 2007. White paper. http://www.3gamericas.org/pdfs/2007_Rysavy_091007.pdf (Downloaded on 2007.09.15.) Shrieves, Ronald E and Wachowicz, John M. (2001): Free Cash Flow (FCF), Economic Value Added (EVA), and Net Present Value(NPV): A Reconciliation of Variations of Discounted-Cash-Flow (DCF) Valuation. = The Engineering Economist, Vol.46:1 (2001), 33-52. p. http://bus.utk.edu/finance/WP/eva.pdf (Downloaded on 2007.09.15.) Smith, James E. and Nau, Robert F. (1995): Valuing Risky Projects: Option Pricing Theory and Decision Analysis. = Management Science, Vol. 41, No. 5, May 1995. 795-816. p. Tancs, Zoltn and Berze, Dezson (2001): EVA A telekommunikcis szektor gazdasgi cscsmutatja? = Magyar Tvkzls 2001/4. 10-19. p. (in Hunga rian language) Torrance, Simon et al. (2007): The Telco 2.0 Business Model Map: Part Four, Action stations. London, UK: STL. Telco 2.0 Blog. 8 March 2007. http://www.telco2.net/blog/2007/03/the_telco_20_business_model_ma_2.ht ml (Downloaded on 2007.09.15.) Tth, Antal (1999): Bencmarking s controlling. In: Gyakorlati Controlling, 10/3. Budapest: RAABE 2005. 2. tdolgozott kiads. ISBN 963-85920-5-2. (in Hungarian language) Tth, Antal (2001): Projektcontrolling. In: Gyakorlati Controlling, 8/12.1-4. Budapest: RAABE 2005. 2. tdolgozott kiads. ISBN 963-85920-5-2. (in Hungarian language) Turner, Anna (2003a): Az EVA-mutat rtelmezse s mrse. In: Gyakorlati Controlling, 4/10. Budapest: RAABE 2005. 2. tdolgozott kiads. ISBN 963-85920-5-2. (in Hungarian language) Turner, Anna (2003b): Az rtkkzpont vezets controllingtmogatsa. In: Gyakorlati Controlling, 4/11. Budapest: RAABE 2005. 2. tdolgozott kiads. ISBN 963-85920-5-2. (in Hungarian language)

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Ulbert, Jzsef (2002): Beruhzsok gazdasgtana. Pcs: Pcsi Tudomnyegyetem, Kzgazdasgtudomnyi Kar. 3. kiads, 2002. ISBN 963-641-291-X. (in Hungarian language) Varga, Ivett (2007): A controllingfunkcik kialaktsa a vllalati informatika terletn. In: Controllingtrendek, 2/3. Budapest: RAABE 2006. 1 kiads. ISBN 963-9600-10-5. (in Hungarian language) Vry, Zoltn (2003): Nem fizikai jellegu szolgltat szervezetek projektconrolling-rendszernek bemutatsa. In: Gyakorlati Controlling, 7/8.6. Budapest: RAABE 2005. 2. tdolgozott kiads. ISBN 963-85920-5-2. (in Hungarian language) Walton, Nicky (2007): Mobile Instant Messaging: The Next Advertising Opportunity. London, UK: Informa Telecoms & Media.

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8 Appendices
8.1 Implemented Financial Models
We demonstrate our proposed financial models for IMS services by a set of Excel files. The illustrative examples are organized into two major groups: planning and estimation, historical facts and forecasts. The planning and estimation is done with a variable time scale. We assume a 12-year calendar for each service. The calendar starts with the business year when the project is proposed and the beginning of execution is planned. The first two years have a monthly granularity to match with CAPEX and OPEX planning processes. The next two years build upon a quarterly time scale to be in harmony with vendor and product roadmaps. The remaining 8 years are planned on a yearly basis, since estimates are uncertain in this long term. The analysis for investment decisions might be done in any months of the first two years. This reflects the practice of quarterly (or monthly) reviews and plan modifications. The time scale always starts with the beginning of the first business year to accommodate comparisons and aggregation. If we have to go outside from the first two years, then a totally new project proposal and a connected business case shall be created. Once the natural measure inputs are estimated, the spreadsheets calculate the expected revenues and costs. Based on these results both a NPV and an NFV analysis are done. Three calculative interest rates are used in parallel: WACC, project specific costs of capital, and varying cost of capital. The project specific rate could express the special risks associated with the revenue estimations. These three scenarios are displayed alongside in all summary sheets and charts. Once the project proposals are ready to evaluate, the user has to establish the links with the CAPEX and OPEX portfolio planning tools. These spreadsheets will rank the projects based on one of the selected NPV values. Other KPIs, such as the profitability index are added to the approval spreadsheet. The decision is done by a manager manually, based on the ranking, the KPIs, and other aspects not included here. After the decision is done, the model calculates the approved budget and provides guidance for further budget allocation. Once the available budget is exhausted and all decision makers agree with the plan, the plan shall be frozen and treated as a Bela Varkonyi Financial Models for IMS Based Services A-1

University of Pcs Faculty of Business and Economics MBA Program

baseline for next review rounds. At each review cycle a new version of the planning files shall be created. Previous plans must be protected and remain read only after final approval. Based on the capital budget allocation the OPEX plans will be also assembled automatically by the modeling tools. One of the most important results is the cashflow needs calendar. The output of the final CAPEX and OPEX plans could be fed into the ERP system for further processing and controlling. When the planned business year starts for each project a facts and forecasts file set shall be opened. The facts shall be entered form the ERP system or from the data warehouse. If some data is still missing than other sources could be added, too, manual entry is always available in our Excel files. The facts spreadsheets are always based on a monthly time scale. They might have a long life-time. Our illustrative templates and example files use a 12-year calendar. Once the factual data is entered, the modeling tools will calculate various KPIs taking into account the time value of money. EVA is computed for the current analysis year. MVA is determined by compounding the past cash-flows. CFROI is also derived from the historical data. These KPIs are also forecasted for future milestones. The structure for discounting and compounding is the same as in the planning files for easier comparison. Based on this similarity the controller may easily add variance calculations to the facts files. The financial analyst may also enter forecasts that are based not on some vague expert opinion, but rather on the already collected historical data. These forecasts could be more reliable then the previously planned values. When a plan review is ongoing, the systematically forecasted values could be used for revising the expert estimates in the new revision of the project plans. The factual data and systematic forecasts are also summarized into the CAPEX and OPEX portfolios. The performance KPIs could be uploaded into the ERP system for further processing (for example calculating the bonuses for the involved managers).

Financial Models for IMS Based Services A-2

Bela Varkonyi

University of Pcs Faculty of Business and Economics MBA Program

8.2 Users Guide


8.2.1 Workbook structure
Each workbook is composed by multiple worksheets that follow a common structure. The following table explains the usual sheets and their purposes: Table 8-1. Standard worksheets
Worksheet name Summary Input Output Usage Pricing Revenues Costs FCF Catalog Calendars _Aux Explanation Summary of critical tuning parameters and KPI results Major inputs from other files or entered here Major outputs to other files Service usage data sheet based on a standard calendar Service pricing schemes based on a standard calendar Calculated revenues based on a standard calendar Calculated costs based on a standard calendar Free cash-flow analysis based on a standard calendar Price catalog for resources to be purchased Pre-computed calendars with various time-scale and life-cycle marking Auxiliary calculations Target audience Human reader, decision makers Analysts Analysts Internal, data collection Internal, data collection Internal, analysts Internal, analysts Internal, analysts Internal, analysts Internal Internal

Beside the standard worksheets other sheets could be added for special calculations or documentation. References between workbooks are done in most cases with symbolic names to have more robustness. There is one exception when we want to utilize the formula extension features where references shall be increased automatically for rows and columns. Most of the worksheets have a major heading at the top and a major index at the left. Frozen window panes are used to help the reader while scrolling through very long tables to interpret the meaning of the data cells. Each worksheet shall have a version number at the top left corner. The bottom of a worksheet is marked with a special color End of worksheet line. The core part of a worksheet is organized into sections and subsections. There is a hierarchical identifier scheme that enables referring to a row even when printed without the original Excel cell addresses. Each important row has a Ref.ID field that Bela Varkonyi Financial Models for IMS Based Services A-3

University of Pcs Faculty of Business and Economics MBA Program

is used to compose cell reference symbolic names. These identifiers must be unique in the whole workbook. Major tables are at the top of the worksheet, while explaining charts are below the corresponding tables to keep the timelines as close together as possible. The layout is optimized for large monitor screening and not for printing. These documents shall be exchanged electronically only in normal operations through a file sharing service.

8.2.2 Naming conventions


Normally we use the A1 reference style in tables where similar formulas are used for multiple rows or columns. This facilitates easy addition of further rows and columns while keeping the consistency of the calculations. For absolute reference we frequently use symbolic names to help the analyst to understand, debug, modify, and audit the formulas used. Symbolic names referring to cells are written with all lower case. References to worksheets start with a capital letter and continue with lower case. Array references always begin with an underline character. Symbolic names may be used to invoke global or local variables. A symbolic cell reference could be specific to a certain worksheet. This is a local variable of the involved worksheet and we allow the reuse of meaningful symbolic names for multiple sheets by defining name spaces. The symbolic name of such a cell or array is always structured. The tags are separated by dots. The first tag is the name of the worksheet and creates a new name space. If there is a Ref. ID field for the cell or array, then this is used for second tag. A further tag could be appended to express the time base (y: year, q: quarter, m: month, w: week, d: day). Even more tags could be added to further distinction of certain part of a line item. Workbook global cells are referred with simple names, but tags could be appended, too. The naming convention is design to help the human reader to understand the formulas. Excel takes no care about the naming conventions.

Financial Models for IMS Based Services A-4

Bela Varkonyi

University of Pcs Faculty of Business and Economics MBA Program

8.2.3 Color coding and other visuals


We also use color coding, font emphasis, and charts to help the analyst to understand and control the worksheets. The intended meaning of cell filling colors are explained in the following table: Table 8-2. Color coding
Color code Light Green Green-Yellow Light Turquoise Purple Green Yellow Red Rose Peach Gold Light Orange Faint Blue Grey Explanation Manual input, could be replaced with links or formulas in later versions Manual input parameter Linked data from another location Forbidden cells: nothing shall be written here, no meaning Normal or good: value is according to rules or recommendations Warning or problem: value is getting outside of the required range Alarm or error: value is violating rules or recommendations Attention: important information, summary Minor structural item Auxiliary structural item Major structural item Meta-data, audit result, or audit separator Internal data, auxiliary calculation Context Input data cells or worksheets Input data cells or worksheets Input data cells or worksheets Input data cells or worksheets Results Results Results Output data cells or worksheets Headings, separators Headings, separators Headings, separators Headings, separators Interim results

Font styles are also used to express meta- information. Characters in bold notify that the cell is very important. The italics style is used to separate structural or internal information. For complex calendar based tables it could be quite difficult for the human reader to see the pattern in the large number of cells. So we usually include in those table charts that summarize those data sets in graphical form that could be the most likely related to expert opinion and historically learned baseline patterns. If there is an accidental mistyping or error in some of the cells, the chart can quickly pinpoint by displaying an anomaly in the normal tendencies.

Bela Varkonyi

Financial Models for IMS Based Services A-5

University of Pcs Faculty of Business and Economics MBA Program

8.2.4 File linking


File linking without a strict control may cause a lot of chaos in complicate Excel workbooks. We impose some rules how to do file linking. Based on these well-defined rules the auditor can check the compliance more efficiency. Inputs from another workbook shall be organized onto a single Input named worksheet. Outputs to another workbook shall be collected together onto a single Output names worksheet. This is especially important for larger data tables. The Summary worksheet is the only place where we may have some other file links for a more natural structure and flexibility, but this should be limited as much as possible.

8.2.5 Self-audit tools


We propose the usage of self-audit tools wherever it seems appropriate. These calculations are marked with a special color frame and usually located at the right or bottom edge of the worksheet. Typical audit calculations might include if the timing of a data item makes sense according to a life-cycle model. For example, costs can occur between the start date of the project and the impairment of the last allocated resources. Revenues could be collected only after the service has been launched and before the service has been terminated. Energy costs m appear already once the system is commissioned but ay the service is not launched yet and could extend into the period when the service is already terminated but the system is not decommissioned yet. Life-cycle audits are based on an interval marking in the calendar and combining it with some checksums of the time indexed values. Another major type of audits is the reconciliation of multiple computing paths that should lead to the same result. This is typically possible with totaling quarterly or yearly aggregates. We do not include all possible audit schemes, since this would make the worksheets too complicated. Only a few characteristic self-audit tools added. But even this limited audit approach may significantly reduce the number of undetected errors from the very beginning. The numbers of failed audit tests are summed up and color highlighted for each worksheet into a single cell, so the maintainer can quickly check if the whole Financial Models for IMS Based Services A-6 Bela Varkonyi

University of Pcs Faculty of Business and Economics MBA Program

worksheet has any major consistency problems. The human readers just have to search for the red color.

8.2.6 Exception handling


One of the most important reasons to use Excel for financial modeling is the flexibility of modifying and tuning calculations. By showing a lot of details of the steps how to compute results, we enable hooking exception handling into the simulation structures. This transparency also helps developing the Excel workbooks in a stepwise refinement, with an evolution though many consequent versions. For example, we may get a value through a complex automated workflow, but we recognize that there must be some problem with the interim results. We can quickly fix it by overriding the values and formulas, proceed with urgent tasks, and solve the underlying problems later. Such workarounds are hardly possible in tightly controlled ERP or closed commercial modeling software environments. It is also possible to build an important model with only manual inputs and later replace the manually entered cells with a complex model behind it, by adding further workbooks and workshe ets and then linking the interim results onto the cells where we previously entered everything by hand. It is easy to misuse this flexibility and create a chaos in non-trivial Excel model. So we have to impose some rules upon ourselves and make it transparent for the auditors helping them to find potential problems. The basic rules could be summarized in the following list: Use the color coding to express the intention how a cell shall be used (e.g. manual input or underlying calculations); Study the Excel made suggestions about inconsistent formulas and tweak the structure and calculations until Excel would not complain; Keep formulas short and simple, complicated computations shall be broken into multiple stages (memory is cheap, so do not spare it); If you need an exception, then use at least the comment field attached to the involved cells for explaining the reasons; Follow literate programming principles, so design the worksheets for your fellow analysts and not for the computers;

Bela Varkonyi

Financial Models for IMS Based Services A-7

University of Pcs Faculty of Business and Economics MBA Program

If it helps understand ing, do not hesitate including comments and explanations into the surrounding cells of the exceptions occurrence; If the exception should become permanent, then clean-up the self-audit tools not to give disturbing alarms. After you managed to keep the deadlines and solve the immediate issues,

please do not forget to review your model and try to transform the exceptions into integral features of the model. Exceptions are allowed, but they should be avoided as much possible for convincing the decision makers that they could trust in the financial models.

8.3 Content of the Attached CD


We have summarized the Excel template files on the attached CD in the fo llowing table: Table 8-3. Template files
File name IMS_Service_Plan.xlt Explanation Project planning data Facts and forecasts Inputs Marketing and technology estimates ERP and data warehouse Outputs CAPEX and OPEX portfolio plan CAPEX and OPEX portfolio facts and forecasts , next round of planning Project plan ning Project plan ning Project plan ning ERP ERP ERP ERP Owner Controlling

IMS_Service_Fact.xlt

Controlling

IMS_Service_Mark.xlt IMS_Service_Tech.xlt IMS_Service_Proc.xlt IMS_CAPEX_Plan.xlt IMS_OPEX_Plan.xlt IMS_CAPEX_Fact.xlt IMS_OPEX_Fact.xlt

Marketing estimates Technology estimates Vendor price catalog CAPEX portfolio plan OPEX portfolio plan CAPEX portfolio facts OPEX portfolio facts

Expert opinions Expert opinions RFI, RFQ, public data Project plans Project plans Service facts and forecasts Service facts and forecasts

Business development Technology Procurement Controlling Controlling Controlling Controlling

For each project proposal an XLS file is generated from each service specific templates. The service word in the template filename is replaced by an abbreviation of the proposed project name. Each project proposal contains only synthetic data

Financial Models for IMS Based Services A-8

Bela Varkonyi

University of Pcs Faculty of Business and Economics MBA Program

for illustration and cannot be interpreted as a real business case. The project codes are listed below: Table 8-4. Illustrative project codes
Project code Vshare Prenab Mpimp r Explanation Peer-to-peer video sharing Presence and network address book Multi-media personal instant messaging with presence OMA push-to-talk over cellular IP telephony with presence Mashup portal Enablers used None XDM S XDM S Provider for None PIM, PoC, IP Tel., Mashup None

Omapoc IPtelp Mashup

XDM S XDM S XDM S

None None None

Since these files are currently under further development, the protections and access restrictions necessary in a production environment are not configured yet.

Bela Varkonyi

Financial Models for IMS Based Services A-9

University of Pcs Faculty of Business and Economics MBA Program

Declaration
I declare hereby, that this master thesis is my own and original work, where all used resources are properly referred inside the text and listed in the References chapter.

Budapest, 5. October 2007. /Bela Varkonyi/

Nyilatkozat
Kijelentem, hogy a szakdolgozat a sajt eredeti munkm, amelyben minden felhasznlt forrsmunkt az irodalomjegyzkben megneveztem.

Budapest, 2007. oktber 5. . /Vrkonyi B la/

Bela Varkonyi

Financial Models for IMS Based Services B-1

University of Pcs Faculty of Business and Economics MBA Program

Acknowledgment
I would like to express my thanks for Zsolt Bedo, my thesis supervisor for his special help. I am also indebted to all the MBA program teachers who made it possible for me to write this thesis work by benefiting from their successful teaching efforts. I would also like to thank my colleagues Gabor Pal and Balazs Birck at the Financial Directorate of the Magyar Telekom MLOB (T-Mobile) to share their valuable experience in practical financial modeling. A special thanks goes to my family, my wife, and my little daughter who have survived the long hours I was spending away from them on assembling and formulating all the materials for this thesis work. I dedicate this thesis to my little daughter, Victoria who will have no w more time to spend with her daddy.

Bela Varkonyi

Financial Models for IMS Based Services C-1