CLECs: Growth Market for Billing Service Bureaus and ASPs

By Lisa Phifer
Core Competence, Inc.

Service bureaus have long been available to offload billing chores from telecommunications providers. Collecting and rating call records, calculating fixed and recurring charges, consolidating data for multiple services, applying taxes and discounts, generating, printing, and delivering statements, handling collections, and balancing payments received against services performed -- all are tasks that can be outsourced to a third party. According to market analysts at Frost and Sullivan, the telecommunications outsourced billing market, $2.58M in 1998, will more than double by 2004. Among those most responsible for this growth: new competitive local exchange carriers (CLECs).

Build, Buy, or Outsource
Every CLEC entering the market today must decide whether to build, buy, or outsource subscriber billing.

"Very few customers build their own billing systems anymore," said Rich Aroian, VP of Marketing at ADC, now owner of Saville Systems. "The only people who attempt to build their own these days are the very high end providers -- perhaps less than 10% of the market. It's just too hard, there are too many better choices, and most LECs want to focus on getting customers rather than building something that already exists."

Alternatives run the spectrum from in-house systems to outsourced services. Some CLECs license billing software from vendors like ADC/Saville, Aptis, Amdocs, Intertech, or ACE*COMM and invest in computing platforms for in-house billing. The CLEC may employ its own billing staff or contract the software vendor to run the in-house system. According to Jim Alsman, OSS Program Leader at Frost and Sullivan, "Some carriers like to maintain control; they keep billing in-house when they do not want to put control into someone else's domain."

Other CLECs run billing applications offsite, on platforms hosted at a vendor service center. Still others delegate the entire billing process to a service bureau like Convergsys, Billing Concepts, EDS, or ADC/Saville. "Many carriers are comfortable with outsourced billing -- certainly more so than outsourced provisioning or network operations," said Alsman. Several factors drive new CLECs to outsource billing, including up-front cost, time-to-market, and staffing.

Pay As You Go
"New CLECs need to get up and running fast and go positive very quickly," said ADC's Aroian. "Capital financing is getting harder to come by, there's more rigorous scrutiny of revenue models, and CLECs need to show they can become profitable in a short time." Software licenses and computing platforms require up-front capital investment. In contrast, service bureaus are "pay-as-you-go": a recurring expense based on the number of ratings or statements.

Kim Hermann of billing systems vendor Intertech agrees. "Many service bureau providers (Intertech being one) can be creative in monthly pricing." For example, a service bureau might charge the CLEC a low monthly fee during the first year of service. "As the carrier's business and revenue grow, the monthly fee can start increasing," said Hermann.

But as the CLEC gets larger, the financial equation changes. "Typically, service bureau customers will bill out around $25K per month," said Paul Gehri, Senior VP of Sales and Marketing at Billing Concepts, a revenue support system supplier. "Once they get to $100K, they'll start to look at licensing and find that it beats the fire out of a service bureau at high volumes."

Hit The Deck Running
Beginning with a billing service bureau can reduce a CLEC's time-to-market. "Startup costs can be pretty inexpensive, perhaps $15K, and can take as little as 30 days," said Gehri. This time period is far less than the three to six months often required to bring up an in-house billing system.

According to Aroian, "If you go back four or five years, service bureau applications were relatively old and inflexible. Today, we're conforming our applications to the CLEC's business, not the other way around. For example, by creating new rate plans and allowing CLECs to bundles new services quickly, without waiting for a long drawn-out change request process. Speed is the key to success for both the CLEC and the service bureau."

Finding staff with telecommunications billing expertise can add delay. "Smaller carriers don't have the available cash, capital, resources, and in some cases telecom knowledge to build systems and business process infrastructure," said Hermann. In fact, a study conducted by Forrester Research in January 2000 identified lack of in-house expertise as the number one reason companies choose to outsource business applications. Billing software vendors can assist with platform administration, process development, and systems integration. But CLECs who outsource may be able to avoid the staffing problem entirely.

For example, consider ChoiceOne, an integrated communications provider that offers local, long distance, T1, and DSL services in 14 US markets. ChoiceOne outsources billing to ADC/Saville's CBP service bureau in Toronto. "Before making this decision, we evaluated whether to bring a billing system in house," said Ythan Lax, Director of Corporate Communications. "We found that the process for billing data entry was pretty much the same either way. Beyond this, there were several factors that influenced our decision."

"One important factor was floorspace and the logistics of installing AS/400 platforms in-house. Purchasing this equipment would have been a significant investment, and floorspace was a factor before we moved to a larger facility," said Lax. "Another important factor was the need to hire singularly-focused operations staff to run these systems in-house. Saville already does this, day in and day out, and are extremely efficient in doing so. We didn't find a compelling reason to run our billing operations in-house, and we still don't see any reason to do so now."

Enabling Growth Through Migration
Outsourcing can be attractive to smaller CLECs. As a CLEC grows, it can become increasingly reluctant to outsource. Cost is one factor; feature limitations are another. Service bureaus may restrict run dates and offer fewer bundling options. Integration with service order, trouble management, and other operations systems used by larger CLECs can be a challenge. "A carrier's network may be such that there isn't a single service bureau who can handle the complete set of services offered by the carrier," said Alsman.

"Carriers who outsource billing aren't your ICGs, your WinStars, your Intermedias – it's the smaller startups that are into service bureaus," said Billing Concepts' Gehri. "CLECs that become large and don't end up being acquired become candidates for licensed billing software."

In fact, a smooth migration path is important to enable CLEC growth. Converting from one billing system to another can be a painful process involving record translation and the potential for lost data. But migration pain can be minimized by keeping the underlying billing software constant.

"In essence, the service bureau is a breeding ground for us," said Gehri. "Outsourcing is not our highest margin market: dealing with startups costs more and yields smaller margins. But you have a great sales advantage if you're already the carrier's service bureau and they want to buy a platform. There's no record conversion required, you just bring in the platform, install it, and the carrier is up and running in-house."

This may explain why a growing number of billing solutions providers now offer multiple deployment options. ADC/Saville makes its Convergent Billing Platform (CBP) and Singl.eView products available in three fashions: as customer-licensed software, as a hosted application, and as an ASP service offering. Intertech offers its Network Strategies software in site license, managed facility, and service bureau formats. Billing Concepts Transaction Processing Services Division operates as an ASP while its Aptis Software Division develops and licenses the software used by TPS. And the list goes on.

From Service Bureaus To ASPs
Another emerging trend: re-spinning the traditional service bureau into an application service provider (ASP). Explains Aroian, "I see two areas where service bureaus are evolving into ASPs. First, ASPs use the public Internet instead of private lines as a transport infrastructure. Second, ASPs replace narrowly-defined service bureau applications with application clusters that provide more comprehensive support for broader business processes."

Indeed, the CLEC business case for outsourced billing closely parallels the "ASP Value Proposition" defined by J.C. Bradford and Company: turnkey solutions, predictable costs and lower up-front investment, faster time to market, ability to scale, minimize the IT human resource headache, and improve focus on core competencies. CLECs that use ASPs to outsource other business applications may more readily grasp the benefits of outsourced billing. They may also be more likely to outsource other aspects of operations support and customer relationship management.

The Bottom Line
Outsourced billing is certainly not for every carrier. In fact, vendors interviewed for this story indicated that software sales still exceed outsourced service revenue. But all confirmed that outsourced billing by CLECs is on the rise. Brian Mickelson, President of ClearWorks Communications, a Billing Concepts TPS customer, stated the argument responsible for growth rather succinctly. With outsourced billing, "Our focus can now be on ramping our revenues as fast as possible. Their systems will simplify our work in growing…our business. Our use of their system is consistent with our competitors and will allow us to save our shareholders money."

Lisa is vice president of Core Competence, a network consulting firm located in Chester Springs, PA.  She has been involved in OSS design and development for local and inter-exchange carriers for nearly a decade.