Overview
l We have been working for some time on a range of new cost-allocation features:
w allocated Service cost results,
split by originating Resource
w intermediate Service elements
for separate network layers
w direct cost results which reflect
Service costs in a fully efficient network l We will start with a look at the framework which
delivers immediate and consistent cost allocation in STEM Switch Switch Upgrades Microwave System Leased Line Base station site Eight channel base station Staff Minute of Interconnection Switch I/F unit
1997 1999 2001 2003 2005 2007 2009 2011 Year 0 100 200 300 400 500 600 700 800 USD (Thousands)
Intrinsic cost allocation
l When a Service requires multiple Resources, STEM
automatically accumulates the respective costs in order to calculate the total cost of provision
l Costs are allocated between:
w multiple Services with
common requirements
w Transformations which
aggregate several separate demands
l This all happens ‘out of the box’ – you don’t have to
Taking control of the allocation
l Service costs are allocated in proportion to the Service’s usage as a proportion of the total
capacity used by all Services or Transformations
l Expression Transformation costs are sub-allocated between inputs in equal proportions by
default, with options to factor in:
w the respective demands
w another basis,
such as revenue
w specific proportions
Try this in a spreadsheet!
l STEM delivers an immediate and
systematic awareness of service unit costs:
w multiple cost
attributes
w lifetime costing
and age profiles
w used and slack
network costs
l And now we have
added direct costs
and a breakdown by originating Resource
Demand goes hand-in-hand with cost
l Cost allocation runs on the back of the calculation framework for demand which is generated at run-time
l Shares of Resource costs are routed to the respective Services responsible for used and slack capacity
l However, the STEM 6.2 model engine only stores results for the total allocations, as costs are consolidated by intermediate Transformations*
* Originally also to limit the size of results files
Business PSTN Residential PSTN Microwave System Erlang B Leased Line Backhaul Transmission Eight channel base station Combined Busy Hour Allocation Consolidation
Even more detail ‘out of the box’
l STEM 7.0 incorporates an efficient mechanism for preserving the separation of allocated costs from different Resources
l No changes to a model are required l It must simply be
re-run with the new model engine
New categories in the Results program
l Now you can explore all the usual cost results for two new types of ‘element’:
w Service / Resource
w Transformation / Resource
l The actual links in a model define sparse sub-sets of all the possible combinations
l Allocated Used Capacity result can be used to understand respective Service shares of the installed capacity of a Resource*
Drawing a cost-breakdown graph
l New graph definitions allow e.g. Service Allocated Depreciation and Amortisation to be drawn directly from the Graph menu
l Choice of ‘elements’ is made in two stages, from:
w all Services
w Resources which
contribute to the selected Services
2D or linear selection?
l By default you will choose first Services, and then dependent Resources, to draw, e.g. {Service 2, Service 3} × {Resource 5, Resource 6}
l But suppose you specifically want to draw only three of the four possible results? l Uncheck 2D to
make a ‘linear’ selection of individual combinations
Nuts and bolts
l The new model engine only generates allocated results for Resources which actually contribute costs to a given Service
l An efficient technique allows these separate Resource costs to be passed through intermediate Transformations without a massive increase in computation
l Although disk space is now cheap, we will probably make this output optional in the final release so that the inevitable performance overhead can be avoided if so desired
Auditing links in a model
l The product announcement for STEM 7.0 says that:
w “the generation of allocated Service cost results, broken down by individual
originating Resources, will provide unprecedented insight into the economics of service provision, highlighting areas where cost reductions would be most
effective”
l In fact, the filtered selection of Resources from
which to choose these results constitutes a new auditing output in itself, and has already exposed
Aggregation with Collections [1]
l Collections are used to provide automatic sub-total results for arbitrary groups of elements
l The names of Collections of Resources are shown with an asterisk in the list of Resources when choosing elements to draw for a graph
Backhaul Leased Line Microwave System
Aggregation with Collections [2]
l Now the same Collections can be used to provide sub-totals of per-Resource allocated Service costs
And the Excel add-in interface too
l The StemGetResult() worksheet function will understand the following labels:
w Business PSTN / Leased Line
w Residential PSTN / Backhaul (for a Collection) w PSTN / Backhaul (Collection × Collection)
l In addition, the usual add-in toolbar buttons can be used to enumerate the defined results of type Service / Resource and Transformation / Resource, as well as the available element combinations
Separate network and business layers
l A new option allows a Service to allocate costs to a driving Resource, and thus back to primary services
l By replacing an intermediate Transformation, such a Service captures both used and slack costs in order to generate fully-allocated intermediate costs
Internal value-chain
l Secondary costs are identified with a single primary cost item as an internal cross-charge
l This must be balanced with an internal revenue charge to avoid double-counting at the network level
l Contrast with the existing value-chain feature in STEM, which models the re-sale of an external commodity, mapping secondary revenues onto primary costs
Limiting the scope of cost breakdown
l The scope of separately allocated cost breakdown is limited to a single layer
l An intermediate Service presents a sub-total of all costs allocated from secondary layers
Individual breakdowns for Resources in primary layer
Sub-total of secondary costs
Multi-layer cost-breakdown graphs
l Choice of ‘elements’ to draw is again made in two stages, from:
w all Services w Resources which contribute to the selected Services – plus dependent intermediate Services*
Essential costs of provision
l Used and slack cost results distinguish between the allocated costs of used and slack Resource capacity
l The Used Maintenance Cost result for a Service is the share of costs from the used portions of all Resource capacities allocated to that Service
l This is the cost of equipment which, if removed, would directly compromise the Service
l The cost of slack capacity reflects the combined cost of planned redundancy and network inefficiency
l The sum of these used and slack costs represents the fully-allocated cost of providing a Service
Concept of used capacity is contextual
l Suppose that one connection for a Service requires one port on a 100-port switch, and that each switch requires a single-switch management interface (MI)
l With a demand of 50 connections, a single switch will be 50% utilised, but the single MI will appear to be 100% utilised if it is dimensioned on the basis of unit capacity with respect to installed switches
l The network will not function without the MI, whereas it would be fine with fewer ports on the switch
How will network costs scale?
l The MI used cost will be the same right up to 100 customers, whereas it will be more useful to grasp the underlying cost per connection when considering how network costs will scale as demand grows
l New Direct Costresults are a refinement of allocated used costs to allow for the utilisation of equipment generating a secondary cost
l In this example, the full used cost of the MI is allocated back to the switch, but only 50% of this is then designated to the Service as a direct cost
A keener indicator for tactical pricing
l Direct cost results are more closely variable with the underlying service demand than used cost results
l Direct costs represent the cost of a fully-efficient network
Customers
Switch
MI
Connections Installed units Allocate costs to total installed switch capacity Direct costs scaled byswitch utilisation Used results show full
Identify the efficient network cost
Direct cost results
factor out jumps caused by unit capacities of equipment
Model the individual drivers Describe the network business Technologies Network capabilities Service packages Extend consistent framework across business functions Customer care Engineering Network
Finance & legal Marketing
Sales
Service cost per line, per minute or per MB
Customer ARPU
Service pricing
Profitability and revenue yield
l The primary goal of the cost-allocation mechanisms in STEM is to calculate the unit costs for internal and external service offerings:
w operators must measure the unit costs of services provided in order to determine
a pricing strategy for long-term survival
w tactical pricing must be balanced with the requirement to cover costs in the long
term
l A secondary initiative is to analyse the breakdown of these costs by Resource in order to prioritise targets for efficiency measures
