TCO and ROI for BSS/OSS & Subscription Business Transformation Programs – A perspective.

Vijay Raghavan Kumar

Vijay Raghavan Kumar, Head of Delivery, North America, Synthesis Systems

Multiple New Age enterprises, Telecom Companies, Communication Service Providers, Traditional Manufacturing Organizations are launching new revenue models, New Commercial offering/ Digital Products and Services. These New Business models are driving large transformations and modernization of existing BSS/OSS and Quote to cash systems and sunsetting of legacy applications. 

Companies are transforming their current legacy solutions into Leading edge SaaS based Lead to cash solutions that can effectively handle every aspect of Subscription Monetization starting from Product Modelling, Digital Channel enablement, B2B Model support for Lead/Opportunity/Quote, Contract life management, Subscription Management, Billing & Invoicing, Payment processing, Complex revenue recognition and Accurate Financial reporting.  These transformations projects need large budgets, investments with multiple projects running over a multi-year period. CIO/Project Leaders must first work on a transformation proposal that highlights the benefits of transformation and take it to the CFO Organization and ask for budget allocations. This is where the discussion starts regarding TCO and ROI of these transformation programs.

In this article, we’ll define both TCO and ROI from a financial parlance perspective, and dive into a list of factors that influence them for BSS/OSS and Subscription Business Transformation Programs.

 

What is Total Cost of Ownership?

For transformation projects, Total Cost of Ownership (TCO) is the sum of all costs that are incurred to implement the solution (typically measured over a 5 year period). The major cost elements are:

  • Software licenses
  • Implementation services
  • Year-over-year support fees
  • Hardware
  • Training and adoption
  • Yearly maintenance costs
  • Yearly compliance costs

A useful TCO Formula is as follows:

Scoping and Estimation
Scoping and Estimation

In addition to the major cost elements above, there are also hidden cost elements that can adversely impact TCO, including:

  • Downtime (and cost associated with downtime and recovery)
  • Software quality issues
  • Hardware capacity replanning
  • Talent pool management and churn

Factors influencing TCO for Subscription Business Transformation and BSS/OSS Projects

Accurate calculation of TCO for BSS/OSS and Quote-to-Cash transformation projects involves including all the above specified cost elements into the calculation. And, due to the very low success rate of billing transformation projects, there are certain cost elements that are very unique to BSS/OSS transformations that should be further quantified. Let us focus on some of the  key hidden costs elements that have adverse impact on TCO including

  • Implementation Overrun – Due to the complexity of scope management, quality of deliverables, and talent management, true implementation costs are very challenging to predict and consider in the TCO. As such, experienced and seasoned BSS/OSS business professionals should get engaged during the qualification process so that businesses have a more realistic expectation of what to expect with implementation.
  • Software Product Management Issues – All software products eventually run into issues, and when these issues are fixed, they’re released as a patch. There is a potential large operational cost involved in testing and certifying patches and deploying it in production including deployment cost, planned downtime cost.
  • Software Instability – There is an old saying in the Operations world that your solution is as stable as the latest stable release. Considering that configuration changes/customizations are inevitable, having said that the solution becomes unstable for every new release that is deployed on production.
  • Managed Services – This cost has a sizeable impact on the overall TCO over the 5 year period. Operations cost is dependent on overall stability and quality of the solution, and the level of automation done will have direct impact on cost optimization/reduction. Managed service cost also should consider cost of stabilizing the new program for first few months of operation.
  • Downtime – Cost associated with managing downtime, providing financial adjustments to customers for downtime if disputed, increased call centre cost to manage customer expectations, Loss of revenue and the associated cost.
  • Software Release and Regular Patch Management– Cost of ensuring that all software products are in their latest patch sets/releases has to be an integral part of the TCO.
  • Knowledge Management – Cost of loss of knowledge due to People Attrition and lack of adequate system documentation.
  • Change Management – This cost element is sometimes underestimated as change management involves reskilling , Corporate communication , Realignment of Departments and processes based on the new transformation , External customer communication change.
  • Project Overrun – Success rate of Billing transformation projects , Quote to cash implementations have been always very low due to multitude of factors and variables impacting timely and quality project completion and in reality there are factors that have adversely impact project delivery including hardware delays, Implementation delays, Software quality issues , Migration issues ..etc.

 

Gartner defines total cost of ownership as a comprehensive assessment of information technology or other costs across enterprise boundaries over time. For IT, TCO includes hardware and software acquisition, management and support, communications, end-user expenses and the opportunity cost of downtime, training and other productivity losses.”

What is Return of Investment?

Return of Investment (ROI) is a more complex financial ratio/metric, as it is derived based on the net profit divided by the cost of investment. When we apply ROI to transformation projects, there are certain factors that can be easily measured and quantified, such as cost of investment, which can be derived and annualized as we have seen the cost of investment from TCO perspective which is related to the total transformation cost.  

Factors Influencing ROI for Subscription Transformation and BSS/OSS Projects

Let us discuss on net profit variable in ROI. Deriving Net Profit can get very complex especially with factors where we have to define the financial benefit that stakeholders derive from using a particular solution . Quote to cash solution and BSS/OSS solution that are being implemented would results in multiple benefits . I have highlighted few key benefits as examples

  • Improved Customer Experience – Multi Channel experience, better UX , Faster access to Customer Data
  • Accurate Quotes
  • Reduction into time to market of New product launches
  • Accurate Bills
  • Efficient Management of Account receivables /Better Debt Management
  • Easy of making payments
  • Accurate revenue reporting
  • minimal revenue leakage
  • Better Automation resulting in reduction of Human errors
  • Efficient and Streamlined end to end processes.
  • Tax Compliance

We then must take these benefits and create measurable and quantifiable metrics and SLAs. Let us take an example of the above benefits and convert them into factors that can directly derive and quantify the profit. Increase in Sales revenue without increase in Sales cost is direct contribution to profit. Similar reduction in cost (Savings) directly contributes to Profit. We classify the above benefits into two types.

  • Sales Benefit
    1. Improved Customer Experience
    2. Accurate Quote
    3. Accurate Bills
  • Savings Benefit
    1. Reduction in time to Market of New products.
    2. Accurate bills
    3. Better Automation
    4. Tax compliance
    5. Revenue leakage reduction.

 

Once we classify them into Sales benefit and Savings Benefit, we can then individually calculate the percentage increase in Sales contribution and percentage of cost reduction / Savings for each of the benefits to come up with Net Income.  Savings benefit will be in the form reduction of work hours as factor of improved productivity (or) Reduction of operational cost due to better automation which must be assessed.

In summary , It is important to define and derive the factors , cost elements , benefits and their associated contribution to costs when planning, Designing and budgeting BSS/OSS transformations and then through the period of the program have regular touch points to measure the costs .We should continue measuring and monitoring these factors to understand the trend , perform course correction and build accurate data for future projections as well. The key to TCO and ROI calculation is identifying all the variables that impact cost especially when there are hidden costs that are hard to quantify.  As a guiding principle, it is important to lower the TCO and increase the value in the long run. ROI focusses on financial performance and value addition while TCO is a cost based financial metric focused on cost prudence.