Posted: 10/1998
Merger Mania
Big News, Big Bucks and Big Risk
By Liz Titan
Telecommunications deregulation is achieving its desired results--greater competition and increased opportunity. The opening of local markets also is spawning inevitable byproducts, such as mergers, acquisitions and the assumption of significant risk to build market share.
In the competitive local exchange marketplace, the battle cry has been, "Go get 'em." Sign up as many customers as quickly as possible. Merge with companies to instantly expand your customer base, services and infrastructure.
In the rush for market share, however, many competitive local exchange carriers (CLECs) are neglecting one critical element--credit risk management. Who are the customers they're acquiring? Are they good risks or bad ones? Are they receiving the quality and breadth of services that build lasting relationships and maximize company profit? What relationships do customers have with other telecommunications providers? Many providers are learning that they don't know the answers to these questions. Some never thought to ask and/or really didn't care until now.
This dilemma is compounded when companies merge. It's simply impossible to determine the true value of a potential partner when the demographics and quality of its customers remain a mystery. In a marketplace where the terms "churn" and "skip and switch" have become as familiar as customer loyalty and prompt payment, subscriber bases and bad debt can fluctuate as wildly as today's stock market. Quantity over quality can lead to inefficiency, lost opportunity and shrinking profit margins.
In particularly volatile telecommunications markets, annual churn rates have reached as high as 35 percent to 40 percent, according to recent studies. Furthermore, the Telecommuni-cations Risk Management Associ-ation estimates that with today's wide array of service options, a dedicated deadbeat could play "skip and switch" for seven years before running out of providers.
Uncollectible debt now is approaching the $5 billion to $6 billion level annually for the North American telecommunications industry and could be compounded exponentially as service bundling increases a consumer's monthly tab from the current average of $120 to upwards of $400.
These startling, disheartening facts have left many CLECs questioning their risk-management strategies. While building subscriber bases has been--and should remain--a top priority, the goals of reducing churn and uncollectible debt must be elevated in importance to ensure long-term profitability.
To this end, "proof of identification (ID)," the current standard of credit approval, is failing to provide adequate information to evaluate the credit worthiness of prospective customers.
Furthermore, this procedure offers scant data about the scope of the telecommunications needs of these individuals or their relationships with other telecommunications providers. Without such data, it is difficult to develop services that will attract and retain high-value, stable subscribers.
Fortunately, proven credit risk-management tools and techniques offer a powerful solution. Decision support and analysis can help providers gather valuable historic information about specific customers, forecast their future behavior and numerically score them according to risk and value. This data can be used in a framework for continuous improvement in customer management. It can be leveraged throughout the customer life cycle to predict who will respond to marketing/sales efforts, who will churn and when, and what products and services to bundle based on risk and value characteristics to attract and retain profitable customers.
Targeted marketing campaigns can be created to attract high-value prospects. Credit limits can be set or prepaid strategies deployed for risky subscribers. Providers can differentiate their customer care procedures for high-value customers. Collections and recovery processes can prioritize newly delinquent accounts, determine the value of the customer and suggest appropriate action.
Advanced credit risk management software can enable providers to implement these new strategies and processes. Automated collections management systems can define and schedule action, organize and prioritize collections activity, and provide employees with succinct information about each account and daily work lists. Credit worthiness also can be assessed by automatically interfacing with credit bureaus to receive common-format consumer reports.
Using tools such as these, incumbent providers have been able to realize a 10 percent to 33 percent drop in net bad debt, 10 percent to 20 percent decrease in collections expenses and a 10 percent to 15 percent decline in average write-off balances.
For CLECs involved in mergers, these methodologies and technologies can be particularly attractive. They enable more educated decision-making regarding potential partners. CLECs looking to merge can prove their value and the quality of their customers. Once mergers have been completed, the marketing, accounting, billing and collections efforts of two different providers can be combined, enhanced and streamlined for maximum efficiency and effectiveness.
In today's merger-mania environment, the old adage, "buyer beware," isn't just good advice. It's a critical business strategy that must be lever-aged through proven credit risk-management techniques and technology to make sound decisions. The risks simply are too high to ignore.
Liz Titan is senior principal of American Management Systems' Telecommunications Risk Management practice. She can be reached at (212) 908-5865.
