Technical cost modelling - A practical guide

> Opinion Paper Technical cost modelling A practical guide 2008/05 www.detecon.com Technical cost modelling – a practical guide Table of Contents 1 Executive Summary ............................................................................................ 3 2 Introduction ......................................................................................................... 4 3 Generic cost modeling framework....................................................................... 5 3.1 Technical cost modeling cycle..................................................................... 5 3.2 Network model ............................................................................................ 7 3.3 Spreadsheet based network model............................................................. 8 3.4 Topological based network model............................................................... 9 3.5 Radio coverage and capacity .................................................................... 11 3.6 Greenfield and brownfield approach ......................................................... 12 3.7 Cost items ................................................................................................. 12 3.8 Service production costs ........................................................................... 13 4 Cost modeling in practice .................................................................................. 14 4.1 Technical concept ..................................................................................... 14 4.2 Rollout plan ............................................................................................... 15 4.3 Model calibration ....................................................................................... 16 4.4 Scenario and sensitivity analysis............................................................... 17 4.5 Identification of cost drivers....................................................................... 17 5 Modeling examples ........................................................................................... 19 5.1 Scenario overview ..................................................................................... 19 5.2 Results ...................................................................................................... 19 6 Conclusion & recommendations ....................................................................... 24 7 Reading on........................................................................................................ 25 8 The Authors....................................................................................................... 26 9 The Company.................................................................................................... 27 Opinion Paper 2 Detecon International GmbH Technical cost modelling – a practical guide 1 Executive Summary Cost estimations are fundamental to every investment assessment. In that context, the level of complexity can range from a pure cost analysis of a single asset to an in-depth business case calculation. In particular cost comparisons require to specify scenarios and appropriate boundary conditions in a very detailed way and the identification of cost drivers can only be based on the exact knowledge of all complex interdependencies of the overall business strategy. Technical cost modeling for mobile operators concentrates on the cost estimation for infrastructure investments. Systematically applied, the technical cost modeling is based on a cost modeling cycle that allows to iteratively calculate investment costs until an optimized result, typically minimized costs, is achieved. Business case calculations provide as an integral part a detailed insight into the costs of an infrastructure investment and its main cost drivers and will help to align the business with the technology strategy. Often neglected or just ignored, the business case or cost calculation has to be compared with the implementation result. On one hand, this will lead to a continuous improvement of the used model. On the other hand, the identification of shortcomings of the assumptions made will allow to further optimize the business strategy. As a direct result of a cost analysis, the so-called service production costs are a metric that can be used for the assessment and comparison of technology options in particular scenarios with given boundary conditions. Giving the price at which a unit of a service has to be sold in order to exceed the costs for producing one unit of this service, the service production costs cumulate all technology and business related aspects, thus, providing an end-to-end assessment of the technology to be deployed. The technical cost modeling is typically supported by appropriate tools with an adjustable level of detail. Spreadsheet models are simple and easy to handle but provide only a very rough and simplified simulation. In contrast, topology based models allow to take spatial and temporal correlations into account by using detailed input data, e.g. of existing networks. It depends on the specific situation which of both approaches is the most suitable. Based on the extensive analysis and discussion of the technical cost modeling framework within this paper, the following main recommendations can be given: Do not focus on single aspects of the cost calculation, ensure a holistic view in the sense that all technology and business aspects are taken into account. This will ensure an iterative alignment of the business and technology strategy and allows to identify the main cost drivers. Support the technical cost modeling by appropriate tools – spreadsheet or topology based, depending on the required level of detail. Ensure that the used model is well calibrated and understand the correlations between model input and output and its validity range. Don’t forget about the modeling once the strategy has been implemented. Use the implementation feedback for the continuous improvement of the cost model and the business strategy. Opinion Paper 3 Detecon International GmbH Technical cost modelling – a practical guide 2 Introduction A successful business strategy is a result of a mixture of gut feeling decisions and business case analyses. Often, the latter is tweaked or flavored just to support the former, but systematically applied, business case calculations are in general a powerful tool to not only underline what is already known, felt or desired but to obtain an objective picture of the problem and its solution. Fundamental ingredients of every business case analysis are revenues and costs which are naturally to be maximized and minimized respectively. On one hand, costs are thereby a consequence of the underlying market, rollout, and technology strategy which directly can be mapped on a certain infrastructure required to serve the service demand associated with the revenue predicted. On the other hand, costs also impact on the chosen technology, rollout, and market strategy. For instance, the introduction of flat fees has to be based on a sound knowledge of the service production costs and the network capabilities. It has to be answered what the minimal cost for the production of one unit of a certain service is and how many units of this service the network can offer. To close the link between revenues and costs a sophisticated cost modeling methodology is required that provides not only information about costs but also allows to identify main cost drivers and critical success factors which can be used to adjust the underlying business strategy. Unfortunately, the development of such a holistic approach is a time consuming and complex task so that it often can be observed that cost calculations are based on non-appropriate models and assumptions limited to certain aspects of the problem and neglecting important correlations. Here, a standardized cost modeling methodology based on best-practice experiences can help to support such strategic decision processes by reducing the time required for the set up, validation, calibration, and execution of a cost analysis. Several studies exist in the literature (see e.g. [1], [2], [3]) in the area of mobile networks that present results of cost modeling and business case calculations but none of them explains in detail the applied methodology and in particular the consequences for the overall business planning process. This paper therefore aims at closing this gap by providing a comprehensive theoretical framework for cost calculations of mobile network operators. Starting with the description of the general modeling framework, it briefly explains the basic principles of radio network modeling and presents the basic steps for a successful application of such models. The paper closes with exemplary results that demonstrate the power of the approach and the capabilities and importance of cost and business case analyses.