Posted: 10/2001

Lean On Me
Outsourced Billing Pipelines Expand as Service
Providers Face Pressures to Offload Non-Strategic Tasks
By Peter Lambert

Telecom and datacom service providers that have weathered months of ill winds
from Wall Street are under pressure to count every penny on both sides of the
accounts payable and receivable ledger — a set of conditions that may be a sign
of balmy breezes for outsourcers.

So say billing service bureau and application service providers (ASPs) that
claim their pipelines of prospects have expanded since last year’s dot-com crash
began rippling through the telecom sector.

"As I’ve seen the bad news grow every day, our pipeline becomes fuller,
growing two-and-a-half to five times the return on direct mail, trade
advertising and other dollars we were spending 12 months ago," says Don
Teague, vice president of sales and marketing for eBillit, the wholly owned ISP
billing unit of telecommunications billing outsourcer Integretel Inc.

chart from EUR Systems

Other billing outsourcers, including DCA Services Inc., EUR Systems,
Metavante Corp. and Profitec Inc., make similar claims.

Indeed, these companies also report a change in the sources of demand, with
more mature service and/or diversified providers and resellers joining startups
in seeking ways to shed the infrastructure and staffing capital expenses
associated with any and all non-strategic functions.

"We’ve expanded the types of prospects we can talk to," says DCA
Services president Rick Nagel. "We’re seeing our traditional new entrants
who face capital constraints, but we’re also seeing companies with legacy
in-house systems but limited back-office expertise and companies that have hit a
debacle trying to build systems in-house."

Billing service providers agree the cost for their services may equal or even
more than in-house operations if the providers offer:

* Savings on upfront cash outlays;

* More rapid time to market than in-house systems;

* Flexibility to outsource some functions while insourcing others;

* And, better execution through full-time expertise in presentment, mailing,
payment processing, collections, call center and other nitty-gritty billing and
customer care functions.

However, the price tag must be balanced with the need to replace fixed
in-house capital costs with variable outsourced service costs.

"Outsourcing on a cost basis alone is only of the past, early days of
outsourcing," says John Caddell, vice president of marketing and business
development for EUR Systems, a turnkey outsourcer of billing and customer care
solutions. "The more persuasive argument addresses essential but not
strategic functions."

In other words, if an outsourcer partner can execute non-strategic operations
better and at near the same cost, then internal energy is better spent on
service creation, marketing and other business-growing endeavors.

While billers concede the impact of the tight economy has not yet
quantifiably shown up in their own ledgers, suddenly tough times have
"certainly exposed the fact that there are existing companies who know how
to do billing," says eBillit’s Teague. "With service providers
downsizing, the in-house builders are back giving us another look, and I think
they’re here to stay."

Fast Cash

What a different world network service providers face from a heyday only
months ago — when venture capital was spent as fast as it was raised on
hardware, software and the assets of acquired companies. Few industries in the
past five years have proved more capital intensive.

In that heyday, a startup competitive carrier "who could attract $30
million in venture capital might have bought a big, in-house billing system as
proof to investors they were putting the money to work," says Randy
Minervino, vice president of sales and marketing for Profitec. "With a lot
less money to throw around, people are making more prudent decisions.

Indeed, with access to that capital drying fast, carriers must consider
alternatives to "the build and then grow-into-it model," says EUR
Systems’s Caddell. "Outsourced services tend to be more variable, since our
costs are metered to what you need at a given time. Even if outsourcing costs
the same as in-house, the financial structure may save capital — a key issue
for a capital-constrained industry like telecom."

Seconding that assertion, eBillit’s Teague says, "The No. 1 hurdle we
see out there is lack of capital. Everyone wants to hold onto cash, and even if
they find over time that outsourcing is slightly more expensive, they don’t want
to get caught in a cash squeeze again. You’re simply not seeing the
half-a-million or million-dollar upfront investments in hardware, software or
anything else any more."

For outsourcers, a tight economy "has enabled small customers without as
much capital to say, ‘I can get out there and establish a presence in the market
without a large capital outlay," says Hans Myklebust, vice president and
solutions strategy manager for electronic present and payment services offered
by the Derivion unit of Metavante. "Others may want eventually to operate
in-house, but they can start with ASP and then, over time, bring it
inside."

The segment that buys Derivion software for in-house installation is
shrinking, he adds, "and even they say they want to retain the ASP
option."

While cash savings matter, they must also come with time savings, an equally
critical benefit of adopting an outsourcer that has already built and tested the
core of its infrastructure, says eBillit’s Teague. "The real driver is time
to market, because by the time you install software and hire experts to
configure and manage it and get it deployed, you’re 18 months down the
road," he says. "With us, you’re up and running in 15 to 60 days, a
plus when you’re under the gun from investors to show returns."

Economies of Detail

Offloading the "item processing and technology burden has always been
the driver" for Metavante, an outsourcer that has for the past three
decades provided payment, credit card, deposit, loan, account and other
back-office processing services to banks and other financial institutions, as
well as custom statement formatting for a billion telecom bills per month.

Indeed, the longer the outsourcer has been in the market, the more plausible
its claims to proven methodologies, effective execution and expertise in the
item processes that add up to pennies lost or found.

According to the billers, many service providers have hit a wall trying to
tackle mounting details that already have been mastered by experienced
outsourcers.

"There have been companies that left lots of pennies on the table over
the years and still made money hand over fist, and those days are over,"
DCA Services’ Nagel says. "This type of economy has wiped away
decision-making based on illusions of control or visibility into profitability,
because they’re forced to drill down into how many provisioning or support calls
were unsuccessful."

In contrast, he adds, outsourcers provide expert people and hardened
processes, "so we typically do a better job in speed and success rates in
things like provisioning."

According to Nagel, in 2001, local service provisioning has become DCA’s
hottest demand segment — an area fraught with complexities including
incompatible interfaces to incumbent carrier systems. To provide out-of-the-box
interfaces to carriers in every region, DCA has acquired the Mantiss electronic
gateway system from Dynegy Inc., helping to reduce new service launch time from
a week into 18 hours for DCA customers, he says.

Similarly, eBillit says a relatively distinct value-add in its relationships
with banks, utilities, other service providers and the like through which it
offers consolidation of bill payments for underserved consumers that are shy
about using credit cards.

Pick and Choose

Established practices also add up to a broader suite of available functions,
and most outsourcers emphasize the flexibility they offer carriers to
selectively outsource pieces of their operations, from front-end customer
registration and validation to billing, bundled discount, tax, printing, mail
and online presentment, payment and collection processing to customer behavior
analysis.

According to Caddell and others, various providers may define strategic
functions differently. "I may not be willing to outsource my service
creation, marketing, customer retention, network buildout or partner relations,
but to concentrate on those functions better, I may be willing to even pay a
small premium to outsource my billing, mail, call center, payment processing and
collections."

Teased out further, the back office of a residential carrier or switchless
reseller may be tilted to collections and customer care, while a
facilities-based provider of a broad array of services may put more emphasis on
controlling its provisioning, says Nagel.

Even providers determined to maintain control of most billing functions want
to offload functions like custom statement formatting, adds Derivion’s Myklebust.

Ironically, if the dot-com crash has sullied the Internet’s reputation, it is
Internet-enabled access to outsourced services that has boosted outsource
flexibility, according to Profitec’s Minervino.

"When we could provide only telecom billing, customers were slipping
away from us, but when, with the Internet as a platform, I was able to come back
with a windfall of integrated applications, we can provide any choice of
functions while the customer retains others," he says.

Consequently, while Profitec currently serves 165 billing-only customers and
35 companies with other back-office services, the latter opportunity is showing
signs of growth. Of 11 active prospects in August, Minervino says, seven were
negotiating for billing plus some back-office services.

Wider Target

Although many greenfield opportunities to serve telecom and datacom startups
have been detoured into bankruptcy court, the billers say they’re seeing a new
family of prospects, from mature carriers and diversified companies and
resellers.

"Carriers that have been there a long time face new businesses they
absolutely have to get into, but they don’t have the budgets," Myklebust
says. "You’d find both established players and startups in our prospect
reports. The telcos and utilities both have not been as strong in Internet
presence as the banks, and now they’re saying they want that Internet
expertise."

According to Caddell, while carrier consolidation has fostered technology
vendor consolidation — creating a "big vendors for big providers"
scenario — the number of outsourcing opportunities has not shrunk.

"There’s actually a lot of white space in very layered providers like a
consolidated Bell Atlantic and GTE," he says. "Various business units,
constituting extraordinarily well-funded IP or voice-over-IP or unified
messaging startups, are left to fill their own back-office needs."

Further, Profitec is seeing its biggest prospect increase among computer,
utility and other "companies in other industries who are launching
internal, well-funded startups but don’t have the back-office systems designed
to support telecom channels," says Minervino.

A utility company that is entering telecom needs new support systems for a
new service that is designed to generate new revenue from existing customers, he
notes, "and that doesn’t fit into the utilities existing operations."

It may take months to quantify this notion that billing outsourcers
constitute actual beneficiaries in a rotten economy, but a few facts appear
clear enough.

"The downturn has put telecom in reality mode, where dollars no longer
grow on trees," concludes Caddell. "You have to pick the things you’re
good at, and while in the short term, the pain people are feeling will certainly
help us, the lessons learned about picking your battles and sticking to what you
do best, I think, will be permanently learned."

The Links

DCA Services Inc. www.dcaservices.com
Derivion www.derivion.com
Dynegy Inc. www.dynegy.com
eBillit www.ebillit.net
EUR Systems www.eursystems.com
Integretel Inc. www.integretel.com
Metavante Corp. www.metavante.com
Profitec Inc. www.profitec.com