THE INTRODUCTION:
The Indian telecom industry has emerged as the second-largest in the world, with over one billion mobile phone users. The industry has witnessed significant growth in recent years, with a CAGR of 7.6% between 2015 and 2020. In addition, the increasing affordability of smartphones and data plans has driven mobile internet penetration, with over 700 million internet users in 2020.
The telecom industry is highly competitive, and companies always look for ways to reduce costs and improve profitability. A structured costing system can provide valuable cost insights and help telecom organisations make informed decisions. This case study will examine how a leading telecom company implemented a costing system to boost profitability.
The company in question is India’s leading telecom service provider with a PAN India presence. The company has a customer base of over ~100 million and a market share of ~10% in the wireless segment.
THE PROBLEM:
The telecom company was facing challenges with controlling costs, impacting profitability. It was difficult to determine the actual cost of providing services, and there needed to be a clear understanding of which services were the most profitable. This lack of clarity made it difficult for the company to make informed decisions about where to allocate resources.
THE SOLUTION:
To address the client's challenge, our team of experts at Chandra Wadhwa & Co. suggested implementing a structured costing system that could provide valuable insights into the company's expenses and revenue streams. Accordingly, we worked with the company in question to develop a cost accounting framework that complied with the Telecom Regulatory Authority of India's (TRAI) Accounting Separation Regulations, 2016 [1]. The framework included the following steps:
Identifying Cost Elements: This includes the various cost elements contributing to the company's overall cost structure. For example, direct costs include employees’, maintenance costs (equipment) and indirect costs, such as overhead expenses like rent, utilities, and insurance.
Identifying Profit centres: Profit centres are individual units or divisions within the organisation that generate revenue and can be held accountable for their own profitability. The company improved profitability in underperforming areas by identifying profit centres. The company maintained separate accounts for each service provided, including voice, data, leased lines, etc. This enabled the company to accurately track the revenue generated by each service and the associated costs.
Identifying Cost Centers: Telecom companies have several departments and functions, each with its own expenses and revenue streams. To accurately track these expenses and revenue streams, the company identified various cost centres within the organisation, such as customer care, marketing, network operations, etc. Each cost centre was treated as a separate entity for accounting purposes.
Allocating Costs: Once the cost centres were identified, the next step was to allocate costs to each cost centre based on the resources used by each department or function. For example, the marketing department incurred expenses for advertising and promotional activities, while the network operations department incurred expenditures for equipment and maintenance. These expenses were allocated to the appropriate cost centres based on the resources used by each department or function.
Analysing Costs: Once the costs were allocated to each cost centre, the data could be analysed to identify areas where the company could cut costs and optimise its operations. The company found that it was spending a significant amount on customer acquisition costs but had a low ROI for those expenses. As a result, the company significantly reduced customer acquisition costs and increased profitability by retaining existing customers and reducing customer churn.