Losing Money on International Long Distance

December 3, 2001

Telecommunication companies have a time-honored relationship based upon legal and business principals to share networks, and when they do, reimburse the provider of the network services. Also called "settlements," this relationship is monitored and audited by a group commonly called the Telco cost organization. Since telecommunications is a worldwide service, international settlements have become a way of life, and is one of the areas US companies are attempting to address in order to reduce rates to the international community. One may wonder how international settlements and CLECs relate. However, today's communications environment forces the two together in a way that most companies are not even aware.

Many CLECs are not just local companies-they also provide a wealth of services that include long distance services. After all, what is the point of being in business if not as a full service operation? With long distance comes the inevitable international calling opportunity. Call it fraud or a billing issue, but if left unchecked, the cost of these calls can impact margins negatively. Many CLEC's think their wholesale provider is providing fraud protection, but that is another story, suffice it to say, check it out.

When CLECs implement contracts with their wholesalers for long distance, they acknowledge the costs to certain countries, usually at a flat rate. The CLEC then resells the long distance minutes to its customers at a slightly marked up percentage, also a flat rate. Standard operating procedure right?

Of course, what many companies, even the wholesalers, forget is the simple fact that not all calls to the same international country are equal. Calls to international premium locations are more expensive than others. If for example, a caller in the US calls a premium number in the UK, which is very similar to a 900 number in the US, the carrier in the UK expects a higher rate than the standard flat rate. After all, the carrier in the UK has to pay the premium rate service provider a fee for terminating call traffic to the premium number, just as US carrier must provide 900 or 976 service providers a higher rate than normal.

This is where arbitrage becomes important. For those who have not heard of the term, arbitrage is the nearly simultaneous buying and selling in foreign markets to generate a profit. What is interesting is that no one really thinks about the arbitrage issue first. Those who can recall, will remember that most foreign Telcos did not allow their customers to call the 900 numbers in the US as they had no way to bill the calls. In the US, we don't even think another country could possibly have such a service as our 900 numbers. This is especially true since the US Telcos forced legislation to restrict the 900-service business.

But the folks overseas are not fools; they have bright individuals that see the benefit of charging consumers higher rates to get sports information or horoscopes-same as that being done in the US. There is only a slight difference. They also realize that the US Telcos do not have the ability to stop calls to these numbers or even recognize that they are occurring. Hence arbitrage. It is a boon to the businessman creating a business to take advantage of this fact.

It is a know fact that in the development of the settlement processes, international marketing and contracts groups within US Telcos routinely meet with their counterparts to assure that the contract language supports the billing each will be receiving. It is also known that in many of these contract discussions, the existence of premium rate services are discussed and rates are approved as proper billing between the two companies. These rate elements are often communicated to the Telco cost groups so that invoices can be properly reconciled. Can you see a problem here?

A rate structure is communicated to a cost group, but what about the billing group? What should be communicated to the collections or at least the fraud organization? Is this a continuing example of the stovepipe?

I recently sat in on an industry fraud discussion, where this situation was bought up. In many instances, the fraud groups had not heard of the existence of the foreign premium rate service and acknowledged that their billing departments were not aware.

The only reason fraud was even part of these discussions was due to the fact that companies were being created to take advantage of the lack of communication in the US. The settlement rates were agreed upon, the calls were made, the US Telcos billed the calls as standard international flat rate, the international companies submitted Telco bills to the US companies for the higher rate, and the US companies paid the bills unquestionably.

So the entrepreneur spirit abounds with businesses having people in the US call numbers in UK, paying the US $.19/min rate while getting paid $1.00/min by the UK Telco. Arbitrage at its best. Fraud or billing problem? You decide. For my money, the failure to accurately account for all rates for all types of service is a revenue assurance issue. But that does not address the problem. The lack of communications across many departmental lines must be considered.

How does this affect the CLEC you still ask? The CLEC is at the end of the line when it comes to long distance. As such they are often removed from many of these international rate issues. Therefore, they are the perfect breeding grounds for companies that use arbitrage as a method to create a fast buck.

It is imperative that CLECs work closely with their wholesaler. Acknowledge that flat rate international is not a standard and think how about how to deal with the international premium rate situation. Just as the wholesaler has communication issues between contracts and billing, there exists another exposure to these companies; the sales force. Used as an unwitting ally, the sales team will sell flat rate international services which re-enforce the perception that all international calls are flat rate. The contracts that are written with the CLEC are also passed through on contracts the CLEC writes with its customers, creating a domino effect.

The real problem arises when the billing organization corrects the billing of premium rate services and the differences in rates already in signed contracts. These pricing structures although usually set in stone, need to have caveats that identify the existence of premium numbers, and that calls to these numbers may change.

Information is power and the CLEC must have the power to control all aspects of their costs and their billing. Knowing the pitfalls of premium numbers allows the information to flow and steps to be taken to assure proper communication between more departments than is being done today. Constantly question the wholesaler on international rate issues. I'm willing to bet that in many cases, your contact at the wholesaler is not even aware of the issue. But what you don't want is for the wholesaler to bill you correctly and leave you holding the bag. Margins are slim enough, protect them.

Jim Marsh is a senior consultant for The Management Network Group, a telecom consulting organization.  Jim has worked in telecom for 15 years and is an expert in revenue assurance, risk management and fraud. Jim speaks and writes on improving operational systems and functions to improve bottom lines.