Discussion case for June 22, 2021 webinar
Internet Protocol Connectivity Services
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. This case makes clear the need to holistically consider the impact of business decisions on an organization’s revenues, costs, and investments.
One of the strategic goals of a mid-sized North American Communications firm’s 5-year plan was to expand its fiber network to provide Internet Protocol Connectivity (IPC) Services, thereby driving profitability and support future growth. A key strategic objective was to expand its net fibre footprint and increase penetration of already connected businesses. This would allow it to grow the very profitable IP based products and avoids having to lease third-party circuits to serve customers with multi-location businesses in major metropolitan areas. For the customer, it offers businesses an alternative to the large Telcos, thus helping the firm increase its market share. A key metric is the number of connected buildings.
A key program was to advance the company’s fiber builds by making targeted investments to multi-tenant business buildings that were within 220 yards of its existing national network in 4 major metropolitan areas. Rather than the approach of build it and they will come, the expansion was based on winning at least one tenant in the targeted buildings. If some of the estimated costs were high, sales would add potential revenue for subsequent customers to justify the build. The program was very successful at generating new revenue and was expanded to smaller cities, removing the distance requirements, focusing on individual business cases taking into account the building potential, the regional differences in the costs to build, and the number of competitors providing IPC services in the building. This change increased the number of target buildings from 2,500 to 5,000. This target list of buildings was maintained by the network operations and marketing groups and included the details of the location including the competitors who also had access and the number of qualifying tenants in each location. (Note: Most IPC customers sign 3-year agreements and in the case where there was a competitor in the building sales would have to wait until the contract with the competitor expired before they could sign up additional customers in the building.)
The firm set aside significant amounts of capital each year for this advanced fiber expansion program. If a potential customer was in a targeted building a simple business case was needed to release the capital. These business cases used 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 were based on average actual data that was captured in a sample of builds. In addition, if there was a high degree of certainty of two subsequent builds, special gear would be installed which would significantly lower the costs of the future connections. The target was a 1.6-year revenue payback for the build investment.
Initial Results and Evaluation:
The challenge facing the firm was while sales was winning new contracts and reporting revenue growth from this fiber expansion, there was little information that tracked and reported on the return on the capital investments. The gross margins on these sales were 100% as all the revenue was on the firm’s owned network.
The individual build costs were being tracked in the project accounting ERP system and reported separately against the program’s capital budget. In many cases the actual build costs would come in much higher than the estimates due to unforeseen obstacles as in many metro areas the fiber had to be buried. This necessitated sales focusing on subsequent additional customers to improve the projected return on investment. There was, however, no detailed report that tracked the performance of the program.
Information Available to Evaluate Strategy:
The fiber expansion cost for each building was readily available as the firm had a very robust project accounting system which had the total cost details, including the actual cost of equipment installed and the fully loaded costs of the labor and materials used. Finance was able to work with Network Operations and Marketing to find key links in the data, including network #, which linked to the fulfillment systems build details, and the customer access network #, which was matched to the customer circuit id and traced to the billing system. The critical element that allowed the link was the network # which was also loaded into the project accounting system. This allowed the build costs for each customer to be traced to the billing systems, which contained customers’ monthly recurring revenue (MRR) as well as any non-recurring revenue (NRI) that sales was able to negotiate as an upfront payment for larger builds.
What are the strong points of the planning effort? Discuss from Marketing, Operations, and Investment perspectives.
What gaps would the Profitability Analytics Framework identify in the planning for this opportunity?
What were the strengths and weakness of the Strategy Validation, from non-financial and financial perspectives?
What would the Profitability Analytics Framework suggest improving?
How could better operational and cost models have improved Strategy Execution?
What type of Evaluation needs to be done now?
How should the results of the evaluation be used by the company?