Vincent Browne Issue: Europe 2003
Article no.: 6
Topic: Cost Based Routing in Eastern Europe and the CIS
Author: Vincent Browne
Title: Founder & CEO
Organisation: Prime Carrier Limited
PDF size: 116KB

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Article abstract

Eastern European and CIS operators lack funds to invest in their infrastructures. Cost savings, without initial heavy investment, are always welcome. In increasingly competitive markets, savings that can be passed on to customers– especially highly cost sensitive smaller businesses – are a tool to build market share. The telecom industry continues to rely on voice for the bulk of its revenues and substantial savings can be obtained by using value based routing algorithms, instead of the traditional least cost routing methods.

 

Full Article

As a result of the liberalisation of the telecommunications sector in Eastern Europe and the CIS and the introduction of competition, the use of cost based routing will become an increasingly important way to maximise the returns and diminish the cost of communications. The telecom industry in Eastern Europe and the CIS, as in the rest of the world, continues to rely on voice for the bulk of its revenues. The promised new economy has faltered and with it the great bandwidth and IP rush of recent years. This realisation has given the industry its biggest ever challenge – how to make money from voice. This article explores the benefits of using a value based routing algorithm, recently introduced to the market, over the current traditional practice of least cost routing. Carriers and commentators alike had forecast the death of voice, which would be replaced by data and VoIP delivery. However, the turmoil seen in the markets since the beginning of 2001 and the resultant lack of funds has forced carriers to sweat as much return as they can from existing networks and once again look inward for growth and profits. This has already had a profound effect on carrier operations. Least Cost Routing (LCR) is fundamentally flawed LCR creates routing plans based purely on lowest rates received, but does not consider the capacity constraints of the supplying carriers or quality measures to measure performance. Capacity planning using LCR is based solely on the highest volume routes and is either ignored or too complex to manage in advance of sending the routing to the switch. The result is unplanned overflow which causes serious management issues due to overly optimistic cost plans – since the actual costs will always be higher than those expected – creating potentially loss-making routes and an inefficient use of the available network. There is a fundamental flaw in the logic that assumes that the least cost routes are being used which, in fact, is often simply not the case. Today, carriers have to get smarter in dealing with three core challenges to run an effective and profitable voice business: 1. Improved rate negotiation 2. Complex routing decisions 3. Timely switch update Each of these areas on their own will generate significant bottom line savings if managed more efficiently, but when all three are managed together then the savings are even greater. The use of a value based routing algorithm synchronises and enhances these core activities to create switch routing plans that reflect the optimum use of the current network and existing carrier connections and then immediately updates the switches. Value Based Routing Algorithms – A New Dimension in Routing Decisions Value based routing algorithms, on the other hand, automatically considers the cost effect of overflow prior to generating routing plans for the switches. This still takes the lowest rates available from all carriers but, more importantly, will consider the rates in conjunction with the capacity available from each carrier and use quality parameters before creating the routing plans. The use of a value based routing algorithm can be shown to improve bottom line profitability by over 200% by just using the same network and the same rates. To explain this, we will use a simplified example: Take 3m minutes carried by 3 suppliers. Each supplier can carry 1m minutes of capacity to any destination. In this case the traffic requirement is 1m minutes to Sydney, 1m minutes to Tokyo, and 1m minutes to Taipei. One would expect, based on LCR calculations, that the cost for this plan to route traffic is $30,000 based on the 1st choice routes. However, in practice, the best case cost for this plan will be $106,450, or three times the amount expected, due to overflow on the network. The overflow is caused because A is in 1st Choice for Sydney and Taipei. Therefore the switches will attempt to send Carrier A 2m minutes resulting in 50% overflow of the traffic for each destination to the next carrier in the table. However, Carrier B, is the 2nd choice for these destinations and is also 1st choice for Tokyo. Therefore, B will receive 2m minutes of traffic for all the destinations and also overflow to the next choice. In the end, the third choice carrier will receive one third of the traffic and the bulk of the revenues. A value based routing algorithm, by using ‘Full Look Ahead’ capabilities, considers the implications of the capacity constraints and quality, as well as rates, before generating the routing table. Some highly advanced value based routing algorithms consider not just destinations, rates and capacity but also quality measures, types of service, trunks, switches, time-of-day and much more to give a network routing plan that far surpasses anything that can be created by evaluating single switches or destinations. An interesting comparison can be drawn between the telecom business today and the PC industry of the 1990’s. As unit prices continue to fall, suppliers have to maintain and grow revenues by increasing volumes or adding additional services. This in turn creates the need for greater efficiencies in the supply chain. More efficient procurement, greater network optimisation and accurate margin management are the order of the day. Just as Dell reigns supreme in controlling and understanding these issues in the still competitive PC industry of today, carriers need to understand and maximise their supply chain to retain competitiveness going forward. Conclusion As in much of the world today, Eastern European and CIS operators find it difficult to find funds to invest in their infrastructures. Cost savings, without the initial heavy investment that cost saving measures often entail, are always welcome. In increasingly competitive markets, such savings can be passed on to customers– especially to highly cost sensitive smaller businesses – and used as a tool to build market share. In short, voice hasn’t gone away and is still very much a core business for carriers. This will continue to be the case for the foreseeable future. Those carriers who adopt a value based routing algorithm early will be the best positioned to win in the ever-competitive telecom market of the future.