How can telecom companies allocate costs more effectively?

1 Cost drivers and bases

The first step in cost allocation is to identify the cost drivers and bases that reflect how the costs are incurred and consumed. Cost drivers are the factors that cause or influence the costs, such as usage, demand, capacity, or quality. Cost bases are the units or measures that are used to allocate the costs, such as minutes, bytes, subscribers, or locations. Telecom companies should choose cost drivers and bases that are relevant, reliable, and consistent with their business objectives and customer behavior.

2 Cost pools and centers

The next step in cost allocation is to group the costs into cost pools and centers. Cost pools are the collections of costs that share a common cost driver or base, such as network costs, service costs, or overhead costs. Cost centers are the organizational units or functions that are responsible for generating or managing the costs, such as divisions, departments, or teams. Telecom companies should create cost pools and centers that are meaningful, manageable, and transparent.

3 Cost allocation methods

The final step in cost allocation is to apply the cost allocation methods that distribute the costs from the cost pools to the cost objects. Cost allocation methods are the rules or formulas that determine how much of the cost pool is allocated to each cost object, based on the cost base and the cost driver. Telecom companies can use different cost allocation methods depending on the nature and complexity of their costs, such as direct, indirect, step-down, or activity-based costing.

4 Cost allocation challenges

Cost allocation is no easy feat for telecom companies, as they must manage multiple, interrelated costs that differ by time, location, and quality while striving for accuracy, simplicity, and fairness. Data availability and quality present a challenge, as telecom companies need reliable and timely data on their costs, revenues, and activities to perform cost allocation. Additionally, understanding cost causality and variability, as well as cost behavior and structure can be difficult. Finally, telecom companies must be transparent and accountable in their cost reporting to stakeholders like customers and regulators. All these issues can be costly, time-consuming, and complex to solve.

5 Cost allocation benefits

Cost allocation can bring significant benefits for telecom companies if done properly and regularly. It can help them optimize their pricing, measure their profitability, monitor their performance, and make informed decisions. Benefits include setting and adjusting prices based on costs, value, and competition; identifying and eliminating unprofitable activities or customers; evaluating performance against goals, budgets, or benchmarks; assessing and managing risks, opportunities, or trade-offs; and achieving strategic and operational goals. However, cost allocation is not a one-size-fits-all solution. Telecom companies need to tailor their methods and practices to their context and needs, and review and update them regularly to keep up with the changing market and customer dynamics.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?