This article is a translation of an article originally published in November 2007
in the German-language telecoms journal NET.
Invitations to tender for ICT projects involving national and regional infrastructures
are becoming increasingly complex. The new port models integrate network platforms,
LANs, telecommunications systems and voice traffic volumes. Because the client pays
a single price per-port, budgetary planning – in other words, the business case
calculation – is also highly complex. Operating costs in particular, which classically
account for 70% to 80% of costs over the useful life of a network, must be optimised.
The currently ongoing Europe-wide invitations to tender issued by several Federal
states in Germany, in the context of which these services, bundled together with
mobile telephony, will be awarded to a general contractor, are a typical example
of this form of integration of several ICT services. As a result, only large bidding
consortia can offer these services. This article describes how the costing of telecommunications
projects can be done using the standard commercial software, STEM.
Typically, such costing of major telecommunications projects is done using Excel,
and regularly results in opaque “Excel monsters” with 50 to 100 sheets. Conflicts
regularly arise, because the division in control doubts the accuracy of the calculations
made by the technicians. The precise meaning of the parameters is often not fully
discussed or understood, lost in an overwhelming sea of numbers.
In Germany, the WiBe Software platform of the federal government’s Co-ordination
and Advisory Agency for IT (Koordinierungs- und Beratungsstelle der Bundesregierung
für Informationstechnik in der Bundesverwaltung (KBSt)) is frequently used in the
public sector. This may well be suitable for consideration of cash flows, but nowadays
in Germany there is a migration to classic double-entry accounting in public-sector
cost accounting. If corporate cost accounting is required, as when presenting a
business case within an invitation to tender, the limits of WiBe are soon reached.
What is STEM?
DOK SYSTEME GmbH, however, swears by the standard commercial, object-oriented software,
STEM. STEM stands for “Strategic Telecoms Evaluation Model” and was designed especially
for the development of cost-accounting and business models for telecoms and IT projects.
It can represent network and ICT infrastructures as well as their associated operating
and personnel costs, and analyse them on the basis of commercial parameters. It
can also take account of different approaches to problem-solving.
STEM’s suitability for a wide variety of techniques is best shown by the range of
projects to which it has been applied. These include:
- calculation of budgetary figures for the national BOS Digitalfunk project (mobile
digital communications for agencies entrusted with security tasks) for the Ministry
of the Interior
- calculation of the value of the transmission network for the cash flow balance sheet
of local authorities during their migration to double-entry accounting
- business-case calculations for the convergent network infrastructures of the individual
Federal states, as well as for commercial wide area networks
- GSM and UMTS network infrastructures.
STEM is suitable for cost estimates in advance of invitations to tender. First,
a system model, i.e. a network model, must be produced using an initial calculation.
This is then populated with typical market data. The important levers, which can
also be used in negotiations, are visible immediately. If the points at which the
main savings can be made are transparent, negotiations can be more targeted. Tenders
that have been modified can be checked for their cost-effectiveness immediately.
Any structural deficiencies in invitations to tender can also be made visible. In
other words, if risks that are too great are shifted onto the tenderer, typically
the tenders are uneconomic. An example of this is flat rates without a price glide
path, which lead tenderers to include considerable risk surcharges, as the future
of telephony will change drastically as the integration of GSM/UMTS with the PSTN
increases. With this solution, a mobile phone becomes in effect a DECT telephone
communicating over the subscriber's fixed line, with functions such as ‘busy’, ‘tandem’,
etc. The features of such a service mean that since many calls are accepted on the
mobile telephone rather than on the fixed network device, much of the incoming speech
traffic to the fixed number is also carried on the mobile network. This leads to
extra connection costs.
General overview of features
STEM is a consistent language with a flexible framework for the evaluation of investments
and services in the telecoms sphere:
- “Service” elements include demand and tariff assumptions from which revenues result
- “Resource” elements represent cost items such as hardware, software, licences, buildings
and personnel, as well as the physical parameters of assets (e.g. useful lifetime
and operating costs).
These elements and core drivers of a business model are represented in the software
by appropriate icons. Behind each icon stand standardised data input masks, which
contain the necessary commercial and technical parameters. This method avoids errors
as the data are always entered in the same way and the financial calculations are
made on the basis of tried and tested algorithms that have been checked and verified
over the years.
Based on the model defined in the model editor, STEM automatically generates a framework
for traffic demand (voice, data), a cost calculation framework, sensitivities, geographical
variants and scenarios. Results can be generated with a granularity of months, quarters
or years. STEM calculates consistent service revenues, equipment installation, utilisation
and replacement, capital investments (capex) and operating costs (opex). STEM includes
parameters for calculating working capital, i.e. taxes, interest, level of debt,
etc., and generates standard financial indicators. Underlying profit and loss accounts,
cash flow statements and balance sheets can also be presented. Hundreds of results
can be output, and can be clearly presented as graphs or tables. These results can
be detailed further, e.g. as:
- traffic requirements of a service in combinations, annual traffic or traffic at
peak traffic times;
- service tariffs and service revenues;
- network elements; used, installed or free capacities;
- investments, depreciation and operating costs per network element;
- determining capital value and other standard indicators such as IRR and ROI;
- operating profit and profit margins.
Results can also be expanded through user-defined results.
Calculating with STEM
For a high degree of project transparency, DOK SYSTEME recommends a hybrid method,
combining STEM and Excel. STEM is used as the financial calculation software. The
basis for the calculation is a network model generated in STEM, which takes account
of all the necessary technical and commercial parameters.
As the direct input of costs in the cost items in STEM is not transparent for the
project owner, and can also be prone to errors, the model is populated via links
with standardised interface tables in Excel. This means that a “database” of cost
elements can be presented to the client along with the accompanying commercial parameters
(illustration).
The principles of STEM: Excel data input mask, STEM model, STEM/Excel output
Rollout curves per cost element, forecast revenues and charges over time, and operating
costs that can fluctuate over time are channelled to STEM via additional interface
sheets, resulting in a linear, transparent structure.
The results for the entire network or for sections of the network, aggregated for
each cost element, are re-imported into Excel via an Excel add-in. This means that
further processing or a specific presentation in Excel can be automated. The client
once again has access to the results in a transparent form. Linear and clearly structured
input and output masks are produced. The customary Excel errors are avoided. Variants
of the results can be discussed and analysed online.
Evaluation is carried out for each cost type in order, for example, to identify
the main cost drivers.
For time-dependent factors, sensitivity analyses can be carried out in a further
step.
Advantages and disadvantages
A significant advantage of STEM is the simple error search. Data can be analysed
transparently not only for individual cost elements and groupings but also for complete
infrastructures. A further strength is that similar networks built by consortia,
or aggregations of regional networks based on the same underlying technology types
can be modelled more easily than in Excel. For this, templates are used and the
technology model is generated generically and parameterised for each regional network.
At the time STEM generates the results, a copy of the template can be automatically
created for each region, containing the specific parameters for that part of the
network. These copies can be evaluated separately.
This feature was used, for example, in modelling the networks of the different states
in Germany for the BOS Digitalfunk. The use of templates means that the same cost
objects do not have to be created over and over again, when only the quantities
involved differ.
Finally, it should be noted that the licence costs of STEM are quickly recovered
when set against the cost of the consultancy time that is generally required for
the development of traditional financial models – and for identifying the errors
in them.
Dr.-Ing.
Jan Steuer has been a Managing Partner at DOK SYSTEME since 2003. Previously he
worked with Siemens’ Carrier and Enterprise Division in the UK. Jan received his
doctorate in the area of radio communications from the University of Hanover, Institute
for Communications, where he worked as a research assistant for several years and
published several papers, and currently lectures on UMTS.
DOK SYSTEME GmbH is a small
German consulting company with 30 employees, specialising in ITC business and technology
consulting. This article was first published online in November 2007 in the German-language
journal NET Zeitschrift für Kommunikationsmanagement.
Original copyright remains with the publisher, NET Verlagsservice GmbH.