The hidden costs of a virtual world

01 September 2017

Many wholesalers are investing more than ever in fraud prevention and revenue assurance, writes Peter Kirwan. The complexity of virtualised networks suggests more of the same will be required.

Declining revenues, squeezed margins, industry consolidation: these are the circumstances in which adding a percentage point (or two) to revenues can make a lot of difference.

Hence the increasing amount of thought operators are giving to revenue assurance and fraud detection

Both are the cause of significant revenue leakage. The US-based Communications Fraud Control Association (CFCA) surveys carriers worldwide biannually: its most recent report, published in 2015, suggests that fraud losses amount to 1.7% of global telecom revenues (approximately $38 billion). Non-fraudulent revenue leakage is a similarly-sized problem. According to a 2016 survey conducted by TM Forum, this kind of leakage -- which carriers typically combat using revenue assurance techniques -- amounts to 1.5% of the average carrier’s revenues.

If we elide those two numbers, what emerges are average annualised revenue losses of over 3%.

This would be significant in any industry: it’s the kind of variance that makes the difference between a career-limiting quarterly bottom line and a world-beating one.

Of course, it pays to be wary of the headline figures. Variations between operators can be substantial. Some of the TM Forum numbers for revenue leakage may contain fraud losses (around half of the RA professionals responding to the survey said their RA organisation also handles fraud management). 

It’s also true that of the 1.5% revenue leakage identified by TM Forum’s survey, around half is recovered by proactive revenue assurance methods. Then again, the numbers for revenue leakage cited here are based on incidents that have been identified. Almost certainly, there are additional unidentified losses out there, of the kind that Donald Rumsfeld would have described as "known unknowns".

Two things are clear. First: revenue assurance and fraud detection have a higher profile inside many carriers than ever before. Second: the threats and challenges can only grow more complex in an IP-based world.

Historically, it was always easy for wholesale carriers to pretend that they really were just dumb pipes, carrying traffic from A to B.

Ravi Palepu, global head of telecom solutions at consultancy and system integrator VirtusaPolaris, sees the same defence being played out on occasion, even today. "If a bank wants connectivity in 22 countries, you end up working with six or seven wholesalers as a partnership channel," he says. "So the person who is at the forefront of the relationship pays the penalties. But this doesn’t always get translated into suppliers and partners paying the penalty as well, for not providing the service. Suppliers get away with a lot, while the wholesaler who signs the end contract takes all the blame from the customer. And that’s where the leakage happens," he adds.

Wholesale contribution

Change is happening, however. Other observers tend to weigh in which telcos at the retail end have raised their game, pressurising wholesalers into adopting a more proactive stance. 

"Let’s say Vodafone UK as a service provider uses BT as a wholesale carrier," says Joseph George, senior vice president of revenue assurance and fraud prevention at Mobileum. "If fraudulent traffic is being pumped to a specific website, there will be an expectation that the wholesaler will monitor and alert their retail partner. Both of them will need to collaborate and share the risk. Wholesale providers will be pushed to share the risk to a very large extent: they will need solutions in place. Vodafone does have a choice among providers: if I can keep my tunnels fraud-free and loss-free, I become attractive in business terms."

Katia Gonzalez, head of fraud prevention operations and services at Brussels-based wholesale carrier BICS, has watched the transformation from a ringside seat: in addition to her day job, Gonzalez was a co-founder and remains chair of the anti-fraud working group at i3forum. She identifies 2011-12 as the point at which attitudes started to change.

"We started to hear the mobile operators complain louder," says Gonzalez. "Their margins were declining. This was also the point at which retail mobile operators had started to sell unlimited bundles, which offered fraudsters a particularly attractive opportunity."

"At one end, you have a retail operator, and at the other, a retail terminator. This is an end-to-end ecosystem, and wholesalers sit in the middle. So it seemed to us that either we work on this problem, or the chain breaks."

Wholesalers have much to contribute, she says. "Large wholesalers are able to take an overview of traffic volumes. We can see changes in traffic patterns that retail cannot. We know what the traffic patterns for a typical weekend look like. We know how Diwali ordinarily affects traffic patterns. So we are in a good position to work on pattern recognition."

What has changed is the size of the addressable market that sits in front of fraudsters and hackers. At the crossroads of digitisation and globalisation, the risks are multiplying. Take roaming fraud, for example. Since the advent of mobile networks, it’s been a problem. It’s much more of an issue today precisely because people are travelling more often.

In addition, as networks shift toward IP, the chances of cross-fertilisation between communications fraudsters and the underworld of IT malware only increases. 

"The same methods keep on running forever," says [Katia]. "But we’ve now got many more entry points. We used to have PBXs that were TDM-based and harder to access. But nowadays with IP technology anyone can try to breach infrastructure anywhere in the world. We have globalisation of fraud: the playground is very big."

In a similar way, the gradual shift from physical to virtual poses an even more stark set of challenges for revenue assurance professionals.

"On a circuit-switched or GSM network, we know what the challenges are," says Joseph George of Mobileum. "If you ask me what are the likely problem areas between switch and billing, I can list a whole number of things. 

"The issue with IP networks is that everyone out there is struggling with the question of where the problems are, and where the control points should be, from a revenue assurance perspective. You also need systems that are architected to handle very high volumes of data in real-time, with analytics on top. And in the increasingly hybrid world, you also need to be able to marry the data from traditional networks with the data from pan-IP networks."

Volume, variety and velocity: it’s a classic big data problem. "You need a platform that can identify unknown problems," says George. "You feed the machine with traditional experiences, and then construct the algorithm to look for unusual patterns."

Retail influence

Ravi Palepu of Virtusa foresees an additional challenge for revenue assurance among wholesalers, which we might describe as consumerisation. "We’re moving away from a world in which you say to your customers: 'Here’s a 12-month lease, here’s the infrastructure we’re providing and you have to pay this much.’ The logic of cloud services -- whether it’s metered or subscription -- is coming to wholesale."

As a result, says Palepu, wholesalers will start to do business in a way that looks like retail: "If a situation requiring resilience occurs, you pay for the solution and once the situation is back on track, you stop paying for the resiliency." 

Like retail telcos, wholesalers will also use bundling as a marketing technique: "So you buy cloud hosting and connectivity for a certain price and if you buy unified comms on top of it, it’s 'x’ minus 'y’." And much of this will start to occur in real-time, or near-real-time, as the flexibility with which carriers can adopt and discard commercial models increases rapidly," he adds. 

"At the retail end of the industry, marketing is very aggressive and their pricing models can become very complex," he says. "A lot of these offers are driven by the marketing organisation. Now they really don’t care much about the management of operations, the conversion of invoices into cashflow." 

Wholesalers may yet find themselves grappling with a similar kind of complexity as they become increasingly virtualized and agile.

In an on-demand world, services are switched on and off as required, and complexity means that trust is harder to verify. One possible solution has emerged out of left field: blockchain, the technology that underpins virtual currencies such as Bitcoin.

Blockchain effectively acts as a distributed ledger: each member of a supply chain possesses a verified copy of the transactions between the parties, associated SLAs, and a permanent record of performance. Potentially, the technology can be deployed in a highly automated way, using so-called smart contracts as the basis for pre-programmed purchasing of network services from supply chain partners.

Yes, all of this is still in the realms of R&D. And yes, significant technical challenges remain to be solved. But there’s no doubt that carriers are interested: among others, AT&T, BT, Orange, Softbank, Sprint and Verizon have all been linked with trails of, or investments in, blockchain during the past two years.

"In the UK, we are doing two proof of concept exercises with two wholesale operators," says Palepu. "In the US, we are involved in one of the discussions there. I would say 30-40% of operators have started to realise that blockchain could make a difference."

Of the eight or nine use cases that exist for blockchain in the communications industry, two are of particular interest carriers: network management and smart contracts. "NM is not only about managing your network effectively. It also enables analysis of the charges the suppliers are posting on to the CSP. And how we can correlate that data point to make sure we’re paying the right bill, and that the suppliers are penalised if they’re not providing the right service."

Indeed, blockchain may yet also become relevant to anti-fraud efforts. One of the more high-profile early use cases to have emerged is roaming fraud, which blockchain could significantly reduce by hosting and distributing public keys to mobile users roaming abroad.

In many ways, an increased focus upon revenue assurance looks like one of the hidden costs of the agility enabled by virtualisation. As digital transformation rolls on, carriers may well need to make significant additional investments in order to ring-fence and protect the revenue that’s rightfully theirs.

Palepu, for example, talks about how today’s approach to revenue assurance is  "always very reactive", often coming into play "when the customer shouts that something is incorrect, or a supplier says you have not paid me for this, or you need to pay a penalty under the terms of an service-level agreement".

Something similar applies in fraud departments. Gonzalez at BICS is clear that a large proportion of telco fraud - including many of the more serious exploits costing $500,000 or more - occurs during the two days of the week when surveillance is weakest: Saturday and Sunday. 

She explains "You need to be a big operator to afford a dedicated anti-fraud team. We have a team working 24/7. But the truth is that many operators cannot afford that kind of service." 

Topics: Fraud prevention, revenue assurance, virtualisation, Capacity media, wholesale telecoms