A communications engineer works with an

Internet Protocol Connectivity Services

Overview

Profitability Analytics encompasses strategy formulation, validation, and execution in three inter-related dimensions: marketing/revenue, operations/cost, and investment. This case study examines a familiar scenario: An innovative strategy to capture new markets is conceived and implemented, investments are made, and operation experience is gained. We will use the PACE™ PA (Profitability Analytics) Model to holistically consider the impact of business decisions on an organization’s revenues, costs, and investments.

The Plan:

Zaniff Corp. a mid-sized North American Communications firm. A core strategic goal for Zaniff is its five-year plan expanding its fiber network to provide Internet Protocol Connectivity (IPC) Services; thereby driving profitability and support future growth. A key strategic objective is to expand its on-net fiber[1] footprint for commercial enterprises and increase penetration of already-connected businesses. This will allow Zaniff to grow its very profitable IP based products and avoid having to lease third-party circuits to serve customers with multi-location businesses in major metropolitan areas. For the customer, Zaniff offers businesses an alternative to the large Telcos, thus helping the firm increase its market share. A key performance indicator metric is the number of connected buildings.


Customers Targeted:  

A key program is to advance the company’s fiber builds by making targeted investments in multi-tenant business buildings that are within 220 yards of its existing national network in four major metropolitan areas. The expansion process is based on winning at least one tenant in the targeted buildings. Typically, the initial buildout cost to install a dedicated Zaniff fiber network in a new tenant building is high. Unless the first subscribed tenant is quite large, the building site can lose money. As a result, subsequent sales in the same building are often critical to profits. Hence, estimates on costs and sales are key to justify a new build.

Zaniff has been very successful at generating new revenue and is expanding to smaller cities, removing the distance requirements, focusing on individual business cases that consider the building potential, the regional differences in the costs to build, and the number of competitors providing IPC services in the building. This strategic change increased the number of target buildings from 2,500 to 5,000. This target list of buildings is maintained by the network operations and marketing groups with details of each location, including the competitors who also have access and the number of qualifying tenants in each location. (Note: Most IPC customers sign three-year agreements, and in the case where there is a competitor in the building, sales to current tenants have to wait until the contract with the competitor expires before Zaniff can sign up additional customers in the building.)


The investment required: 

Zaniff has set aside significant amounts of capital each year for its advanced fiber expansion program. Once a potential customer in a targeted building is identified, a business case is needed to release the capital. These business cases use the monthly recurring revenue (MRR) from the contract, the MRR from potential contracts for subsequent customers, and the standard cost of a build in each of the regions. The standards are based on average actual data that are developed based on samples of past builds.  In addition, if there is a high degree of certainty for two subsequent builds to additional tenants in the building, special gear is installed that significantly lowers the costs of the future connections. The targeted revenue payback for a build investment is 1.6 years. The gross margins on sales are 100% as all the revenue is on the firm’s owned network.


Initial Results and Evaluation:

The challenge facing the firm is while Sales are winning new contracts and reporting revenue growth from this fiber expansion, there is little information that tracks and reports on the return on the capital investments. Individual build costs are tracked in the project accounting ERP system and reported separately against the program’s capital budget. In many cases the actual build costs can come in much higher than the estimates due to unforeseen obstacles in many metro areas because the fiber has to be buried. When there are increased costs due to problems getting the fiber buried, Sales must focus on subsequent additional customers to improve the projected return on investment. There is, however, no detailed report that tracks the performance of the program.


Information Available to Evaluate Strategy:

The fiber expansion cost for each building is readily available as the firm has a robust project accounting system that provides total cost details, including the actual cost of equipment installed and the fully loaded costs of the labor and materials used. Finance is able to work with Network Operations and Marketing to find key links in the data, including main network #, which links to the fulfillment systems build details; and the customer access network #, which is matched to the customer circuit ID and traced to the billing system. The critical element that allows the link is the network # which is also loaded into the project accounting system. This allows the build costs for each customer to be traced to the billing systems, which contains customers’ monthly recurring revenue (MRR) as well as any non-recurring revenue (NRI) that Sales is able to negotiate as an upfront payment for larger builds.


The Finance Report:

It was agreed at an Investment Review Committee meeting chaired by the VP Finance that Finance would lead an analysis with the support of Marketing and Network Operations, with the goal of reporting on the actual performance of the Advanced Fiber Build Expansion Program since its inception (Zanif is three years into the program). Finance committed to present the results to the CEO and the Leadership with recommendations on key issues.

Using the data available, Finance was able to prepare a summary of the program over the three-year period and provide details for 544 locations. The report included the following information: the building address, the region, initial build completion date, subsequent build completion date, the build cost, the booked MRR, the booked NRI, the revenue payback, and the total businesses in the location. Key insights from the Finance report are provided below.


Key Insights & Recommendations

51% of the buildings have zero subsequent builds and a revenue payback of 3 years or more.

Sales should target renewals and new customers in these locations. Incentives should be given for subsequent sales as the major investment is already completed.

30% of the buildings have a build cost that is higher than the region average.

Network operations should visit all future locations for inspection (in addition to the satellite view). If costs are too high, Sales should negotiate an NRI to offset.

5% of the buildings have just 1-2 tenants.

Critical for Sales to renew these tenants as not doing so could strand the assets.

There are a number of cancelled builds that have initial investments >$10K.

Sales should follow-up with customer and ensure recovery or another build.

There are a number of buildings that have been on hold for >3 months.

Sales should follow-up with customers to understand and resolve any technical issues.



Discussion Questions:

  1. What are the strong points of Zaniff’s five-year plan?  Consider the planning process specifically from a marketing, operations, and investment perspective.

  2. How might the Profitability Analytics Framework be used to identify gaps in the Zaniff approach to establishing the five-year plan? 

  3. From both a financial and non-financial perspective, what are the strengths and weakness of the approach by Finance to validate strategy? Use the Profitability Analytics Framework to suggest improvements.

  4. How could the Profitability Analytics Framework be used to evaluate managers’ execution on revenue, cost, and investment strategy?


Results:

One year after the reporting and action plan there were significant improvements in the performance metrics:

  1. Marketing and Sales developed programs to promote subsequent builds that are now completed in 75% of the buildings, significantly increasing revenue and improving the revenue payback for the capex investment to these buildings.

  2. Capex efficiency improved as site visits significantly reduced the build costs and, where there were issues with access, these were documented and provided to Sales which, in many cases, was able to negotiate onetime NRIs with the customer to offset the higher costs.

  3. Sales has subsequently avoided new buildings with less than two tenants and is focused on renewing contracts in the sites with 1-2 tenants.

Conclusion:

The impact of doing a detailed analysis of the Advanced Fiber Build Expansion Program highlighted the importance of holistically considering the impact of business decisions on Zaniff’s revenues, costs, and investments. The analysis in this case identified a significant number of underperforming buildings and high build costs. The actions described above significantly improved revenue and lowered the building revenue payback.


[1] On-net buildings are properties where network service providers have physically built connectivity with fiber that they own. As a result, tenants can move into the building and receive internet connections right away.