STEM newletter

Modelling the costs of ICT infrastructures for tendering purposes

30 January 2008

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.

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