Case study

The importance of proper

planning for telecom procurement
Summary
The fallout from the global downturn has left the majority of companies seeking cost reductions
in many areas of their business. Prior to the downturn, companies negotiating contracts for voice
and data services with telecoms providers were able to generate double-digit savings. Today, these
dramatic savings are harder to achieve as companies look to squeeze already lean operations
further. As companies attention turns from cost reduction to cost optimization, they need to delve
deeper and conduct in-depth analysis into costs in order to generate sustainable long-term savings.

Telecommunications infrastructures are logistical systems and the same concepts deployed
for planning and managing logistical networks can be applied to telecommunications networks.
Therefore, when negotiating a contract with telecoms providers, it is imperative that companies
compare not only prices per service (tariffs), but also prices per transport strategy. This means
companies need to perform detailed analysis on the trafc interest, prole and volume prior
to any telecom infrastructure negotiation. A detailed analysis and understanding of the trafc
needs, arrangements alternatives (topologies) and transportation alternatives (technologies and
providers) is crucial for effective negotiations.

In this article we discuss why incorporating trafc planning and the deployment of network design
tools to the negotiation process is so important, demonstrating how these techniques were
successfully deployed by one of our clients.

The analysis process trafc planning and the deployment of network

design tools
Due to the large volume of data that needs to be manipulated and the complexity of the analysis
involved in designing a telecommunications network, analytical tools are essential to aid planning
prior to entering into discussions with telecoms service providers. Analytical tools such as Ariete
design tool (WANOPT) and NPAT Network Planning & Analysis Tools(WANDL) identify the ideal
network structure required to support communications between geographical regions of the
organization, trafc (prole/volume/interest) and the transport costs. These tools are usually
deployed with methodologies that encompass the following steps:

Data gathering/le preparation

Deployment of the tools

Rening results and denition of the negotiation strategies

Authors
Importance of proper planning
Luiz Augusto de Carvalho is a telecommunications
engineer and business administrator from Brazil,
specializing in wide area network design

Although nature commences with reason

and ends in experience it is necessary for
us to do the opposite, that is to commence
with experience and from this to proceed to
investigate the reason.
Leonardo da Vinci

71
Data gathering/les preparation
phase 1
The rst phase consists of identifying
and formatting the data to be analyzed.
This data is typically grouped into ve
categories:
1. Applications (voice, data and image)
2. Sources and destinations of trafc
(users and organizations sites)
3. Interconnections (connections
available)
4. Interconnection costs (tariffs and
costs of building the connections)
5. Potential clustering nodes (sites
where trafc can be concentrated)
These stages help demonstrate that
network design software also aid strategic
decision making in addition to their
importance during the pre-negotiation
planning phase
Scenario simulations phase 2
Based on the data identied in phase one,
and with the help of design tools, cluster
scenarios (topologies) can be generated.
These calculate all possible combinations
of access, backbone (the data links
connecting the main hubs of the network)
and hardware that will be required for
each scenario and allows companies to
select the telecoms providers with lower
costs with more adherent to a set of
parameters (heuristic problem).
Rening the results phase 3
Once the scenarios are generated and
their costs calculated, companies can
rene the results to include specic
considerations, such as adjusting models
and taking into consideration several
levels of services (including adjusting
parameters such as utilization rate,
tolerable latency and loss rate).
At the end of this phase, companies should
have a good understanding of their needs
and a reasonable view of how much the
structure would cost to set up and manage,
and should be in a position to engage and
negotiate with potential telecoms service
providers.
As the negotiations develop and proposals
and contra-proposals are made, companies
must recalculate the structure (phases 2
and 3), identifying the impact of the new
costs presented in the nal price of the
structure as a whole.
These stages demonstrate that network
design software aids decision-making tools
in addition to its importance during the pre-
negotiation planning phase.
Case study: organization
optimizing its 0800 service
This case study details two contrasting
approaches our client, the Brazilian
arm of a global diversied nancial
services company, took when seeking to
reduce costs. The company was keen to
investigate the cost savings they could
generate if they reduced their use of free
phone (0800) numbers across Brazil. By
adopting two approaches a traditional
procurement process for telco services
and a process supported by methodologies
and design tools they saw very different
results and were able to drive down the
cost of their communications beyond
their expectations.
The company was seeking alternatives to
reduce its current telecommunications
costs of approximately USD828,000 per
month. Initial, low-level analysis revealed
the following results:
The total of spoken minutes per month
was 4,519,676
The number of calls was 1,396,327 per
month
The average call duration was 3.23
minutes
All calls were handled by a call center
located in Rio de Janeiro and originated
from all parts of Brazil
The company paid a at rate for all calls
as part of their current contract with
one of Brazils main incumbent local
exchange carriers (ILECs)
Traditional approach to negotiations
Initially the company took a traditional
approach to the review, i.e., identifying the
total minutes and obtaining a quotation
based on total talk time. The company
compared the telephone bill for 0800
calls, verifying how much it would cost
if it was charged using eight different
charging plans from four service providers:
Telco 1 (basic plan, 31 other plans and
one specic plan currently used), Telco
2 (basic plan), Telco 3 (two specic
proposals) and Telco 4 (basic plan and
one specic proposal).
These simulations show the correlation
between the amount currently paid and
the savings that could be achieved through
negotiation (see Table 1).
 Importance of proper planning

Table 1. Correlation between the amount currently paid and the savings

Charging plan Value (USD) Difference (USD) Percentage Average price per
minute (USD)
Telco 1 specic plan currently used 828,371.96 0.00 0.00% 0.18
Telco 1 basic plan 2,054,728.00 1,226,356.04 148.04% 0.45
Telco 1 31 other plans 1,064,075.22 235,703.26 28.45% 0.24
Telco 2 basic plan 2,234,624.00 1,406,252.04 169.76% 0.49
Telco 3 (1) specic proposal 725,195.65 (76,176.31) -9.20% 0.17
Telco 3 (2) specic proposal 687,619.40 (140,752.56) -16.99% 0.15
Telco 4 basic plan 2,078,482.77 1,250,110.81 150.91% 0.46
Telco 4 specic proposal 673,642.35 (154,729.61) -18.68% 0.15

Source: Authors research

This is a common strategy that aims to
provide a basis for comparison between
the values currently paid and costs that
the organization could paying if they
switched to another provider. This process
set a benchmark for the cost savings that
could be achieved using the traditional
negotiation approach: a reduction of
approximately 18.68% (Telco 4).
Although 18.68% is without doubt a
substantial gain, the organization decided
to engage with Ernst & Young and invest
in some more in-depth analysis to better
understand where the current costs come
from and identify alternative solutions.
Digging deeper
An in-depth analysis of telephone
charges was undertaken to discover
the origins and destinations of trafc
and, in addition, transport alternatives
were identied including the possibility
of building a private voice network to
replace 0800 calls.
Based on the geographical distribution of
callers, the company used analysis tools
to identify the ideal structure to support
the call center trafc. The proposed
structure would have 22 regional nodes
(see Figure 1) connected to Rio de
Janeiro through dedicated circuits. In this
scenario the company would adopt local
numbers in each node. The 0800 number
would only work outside these 22 areas.
This structure would cost USD557,838
per month generating a saving of 32%
(USD270,162) based on current
expenditure.
We also took into consideration the cost
of building these nodes (considering
weighted average cost of capital [WACC]
and total cost of ownership [TCO]),
including the hardware lease costs and real
estate rental costs, taking a conservative
approach when dening costs. The 22
nodes were as shown in Table 2.

He who loves practice without theory is like the

sailor who boards ship without a rudder and
compass and never knows where he may cast.
Leonardo da Vinci

73
The suggested topology was a star
conguration, where all the systems were
connected to a hub in Rio de Janeiro.
However, some marginal gains could be
obtained through composing ows over
the same physical paths (e.g., trafc from
Porto Alegre and Curitiba coming to Rio de
Janeiro through So Paulo).
We also did simulations identifying how
much the structure would cost if the local
callers paid for calls and if the company set
up an interactive voice response system
(IVR) located in the nodes instead of
centralized in Rio de Janeiro.
Figure 1. Proposed structure to support the call center trafc
Backbone cost USD 116,904.71
Access cost USD 424,983.59
Hardware cost USD 15,950.00
Total USD 557,838.30
(All these costs are monthly)
Source: Authors research
Once the simulations were complete and
costs analyzed, our client contacted their
current provider to present the results.
Our client was able to clearly demonstrate
that if it was to build its own structure
using 22 nodes the nal cost would be
USD557,838.30 per month. In addition,
the client demonstrated that there was
the possibility of deploying local numbers
in each node, transferring the access
cost entirely to the users (60.65% of the
USD424,983.59).
The strategy of building a transport
network, together with transferring the
access cost to the user, would reduce
the companys expenditures to around
USD300,000 month. From the service
provider perspective, the potential loss of
revenue would be higher than USD270,000
month (the difference between the current
cost of USD830,000 and the foreseen
cost of USD560,000), as USD260,000
of the USD560,000 would be paid for by
users, in part generated outside the service
provider coverage area. This trafc would
be certain loss of revenue (So Paulo, Porto
Alegre and Goinia corresponding to 17%
of the total access trafc). In addition,
the backbone links could potentially be
purchased from other service provider.
This left our client in a strong negotiating
position. Confronted with the prospect of
losing the contract altogether, the service
provider provided a new proposal that
brought costs in line with those that could be
achieved through a private network. Their
counter-proposal offered a reduced at
rate per minute, bringing the nal cost to
USD450,000 month.
From our clients perspective this was a
signicant cost reduction (45% against
current charges) achieved without the
need to invest in building their own private
network. In addition, they were able to
avoid changing providers, which can be
complicated by punitive termination clauses.
This case clearly illustrates that when
companies are planning telecommunications
networks and negotiating with providers,
they should not be simply comparing tariffs
but also comparing prices per transport
strategies. This example demonstrates
why analytical software and design
methodologies are essential tools in the
negotiation process.
 Importance of proper planning

Table 2. 22 nodes of the proposed structure

S. no. Node name Area Total number Number of Number of Number of Number of Number of
code of users users (local) users users users users
associated to (50km- (101km- (301- (above
the node 100km) 300km) 700km) 700km)
1 Belo Horizonte 312 109,203.00 47,843.00 15,821.00 32,126.00
2 Juiz De Fora 322 38,946.00 17,501.00 10,783.00 10,662.00
3 Uberlandia 342 59,831.00 15,509.00 9,408.00 29,371.00
4 Maceio 822 52,363.00 20,072.00 2,699.00 29,266.00
5 Manaus 922 28,854.00 21,888.00 182.00 312.00
6 Feira De Santana 752 51,236.00 26,508.00 3,708.00 2,822.00 4,363.00
7 Itabuna 732 33,819.00 18,516.00 646.00 9,574.00
8 Salvador 712 35,485.00 34,379.00 1,106.00
9 Fortaleza 852 86,730.00 66,795.00 1,174.00 7,682.00
10 Brasilia 612 108,283.00 69,901.00 18,785.00 2,849.00 2,666.00
11 Vitoria 272 78,184.00 38,052.00 3,990.00 33,158.00
12 Goinia 622 82,807.00 62,717.00 5,889.00 12,435.00
13 Sao Luis 982 30,017.00 14,532.00 2,339.00 4,147.00
14 Cuiaba 653 46,450.00 23,131.00 92.00 3,032.00
15 Belem 912 22,597.00 18,396.00 288.00 334.00 146.00 0.00
16 Joao Pessoa 832 36,580.00 24,787.00 4,658.00 7,063.00 0.00
17 Recife 812 102,397.00 90,704.00 3,236.00 8,457.00
18 Curitiba 412 96,423.00 38,524.00 7,783.00 23,711.00 0.00
19 Rio de Janeiro 21 113,873.00 85,752.00 7,465.00 1,172.00 19,484.00 138,635.00
20 Natal 842 26,537.00 25,189.00 1,348.00
21 Porto Alegre 512 52,124.00 27,666.00 225.00 3,571.00 15,714.00 0.00
22 So Paulo 11 106,302.00 60,125.00 23,184.00 22,993.00
Total 1,399,041.00 848,487.00 33,707.00 100,502.00 277,710.00 138,635.00
Percentage 100.00% 60.65% 2.41% 7.18% 19.85% 9.91%

Source: Authors research

75
Utilizing tools to simplify
analysis
To illustrate the complexity of the
calculations involved when designing a
telecommunications network, lets assume
a situation where we locked the topology
into seven nodes, assuming a company
has two data centers and six applications.
We are also assuming that we are going to
compare ve service providers and each
one has six alternatives of services.
In this specic topology we have 6 x 6 x 6 x the structure grows. A medium-sized
6 x 6 x 6 possible physical routes = 46,656 organization can easily have third or more
physical routes. In addition: nodes. In the example below, we can see
how the problem grows complex as the
Six applications and two data centers
number of nodes increases:
Five service providers with six services
44 x 6 x 5 x 6 = 46,080
each
55 x 6 x 5 x 6 = 562,500
This means the total number of
alternatives compared for this topology 66 x 6 x 5 x 6 = 8,398,080
could reach 8,398,080 (66 x 6 x 5 x 6).
77 x 6 x 5 x 6 = 148,237,740
The number of alternative options
88 x 6 x 5 x 6 = 3,019,898,880
increases dramatically as the size of
 Importance of proper planning

99 x 6 x 5 x 6 = 69,735,688,020 Would it be possible to make the

1010 x 6 x 5 x 6 = 1,800,000,000,000
A typical analysis considers hundreds of
topologies.
Questions companies need to ask
themselves are:
What is the possibility of manually
identifying the ideal structure if we were
analyzing a network with 10 nodes?
necessary calculations quickly enough
so they are relevant and can be used in
a negotiation process?
It is clear to see that the volume of data
and the calculations are way beyond
what can be done manually and, in order
to analyze data effectively, deploying
analytical tools is essential.

What would be the possibility of

identifying a good design doing these
calculations manually ?

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