Telecom Fraud Management: A Strategic Perspective
The Benefits of Integrating Loss Prevention into Corporate Strategy

By David West
ECTA Review 2001

As regulatory, financial, and market forces shift, new opportunities are created. No industry demonstrates this point better than telecoms. Throughout the world changing dynamics are leading to unprecedented opportunities for new competitors to enter the market and for existing carriers to expand their product offerings. With each new opportunity, come new risks. These can be mitigated, however if carriers take care to address telecom fraud management issues within their corporate strategy. Below are guidelines to help senior managers responsible for business strategy and revenue assurance managers responsible for fraud control work in concert to achieve corporate goals.

An effective telecom fraud management process can be a critical element in determining whether a carrier is successful or not.

For many carriers growth in revenues and profits is the goal that drives the product development process. Management and the sales team devise and execute a strategy that dictates the products and markets the company will focus on. Since most successful marketing strategies are based on the promise of delivering something new to the customer, this often means offering a market segment a product previously unavailable or providing a currently available product at a new (and lower) price.

In telecoms, the telecom fraud management team can significantly impact the success of either of these approaches. Fraud management should not impede the process, but must facilitate it by responding quickly with effective solutions for protecting the carrier as the business strategy evolves. To do so requires a dynamic skilled staff, using robust, flexible tools, and a clearly defined process.

As the number of carriers increases, and rates decrease, more companies find themselves competing and succeeding by offering products previously overlooked by more established carriers. Often these are products with a higher fraud exposure. Several international service providers demonstrate this. These carriers market to a customer base known to have a higher incidence of fraud, and specialize in terminating traffic to high fraud countries and regions. By taking on traffic others are unwilling to accept, and embracing customers outside the marketing plan of competitors, these companies have created new opportunities. This would not be possible without an effective telecom fraud management process in place.

"We couldn't successfully offer casual access to international destinations without effective fraud protection. In the metro area we serve, in particular, a carrier's exposure to fraud is elevated. Yet, our telecom fraud management system has allowed us to support this extremely high-risk product line, with minimal fraud losses." says the fraud manager at one carrier.

By protecting margin, fraud management can also support a carrier's ability to compete based on cost. This is critical in a competitive market such as telecoms, where the trend is clear-prices decrease over time. As competition comes to markets once protected by regulatory or technological barriers to entry, prices begin to drop. In the United States this model has repeated itself first with domestic long distance, then mobile, local service, and now international long distance. As products and services become more like commodities, and with the specter of flat-rate pricing hanging in the future, all functional areas within the existing telecom company are called upon to help defend margin.

Strategic Guideline #2 The Benefits of Telecom Fraud Management Come at a Cost

Like all investments, the goal of telecom fraud management is to achieve maximum fraud control with minimal expense.

Fraud losses are a direct hit to a carrier's margin. Telecoms must make payments to their underlying carriers and pay access charges for the traffic, even if it was fraudulent or they never receive payment for it. Fraud also impacts margin by utilizing resources-both network capacity and staff time. By reducing the financial losses and resource utilization caused by fraud, the fraud control team plays its role in shoring up margins, allowing the carrier to compete more effectively and profitably.

Fraud management is a cost center; there is no way to avoid that fact. Like other expense categories, each expenditure is deducted from the bottom line. Telecom fraud management costs include the obvious capital expenditures such as software for monitoring network traffic and the hardware to run it, as well as the staff resources required to manage the fraud control process.

Just as important are the non-monetary costs of fraud management. These include the costs associated with establishing and maintaining coordination links between customer care, billing, provisioning, and fraud management. To limit fraud losses, each of these groups must work together and support the others.

Another potential cost associated with fraud control is the impact on sales. If care is not taken up front to ensure customers' credit-worthiness and the company's ability to offer new products and services without incurring unacceptable fraud risks, the fraud management team will be held responsible for the resulting losses. Therefore fraud management may also have the effect of impeding the sales and new customer acquisition process, if they are not working in concert with the sales and marketing efforts.

Unlike most general and administrative expenses, however, the investment in telecom fraud management should yield a clear return, in this case a reduction in fraud and a corresponding increase in the company's net proceeds. This reduction in losses should offset money spent on fraud management. In that regard, the impact on the bottom line is more like that of the sales department. The investment should yield a positive return-not in earned revenue but retained revenue.

Like sales and marketing expenditures, fraud management is also subject to the law of diminishing returns. Over time, each additional investment in fraud management yields an ever smaller reduction in fraud losses. During the initial deployment of a telecom fraud management process, a small increase in fraud prevention spending leads to a large decrease in fraud losses which means a significant impact on the bottom line.

Over the long term, however, a small increase in fraud prevention spending leads to a small decrease in fraud losses which means a smaller impact on the bottom line.

At some point the return on each incremental investment plateaus, then decreases, until ultimately the net return is negative. Maximizing the return on the fraud management investment requires finding the appropriate balance between reducing fraud losses and increasing fraud control spending. Maximizing the return on your fraud management investment does not mean maximizing spending, nor does it mean a carrier will never again suffer fraud losses. Simply put, at some point it does not make sense to increase your investment in telecom fraud management.

Eliminating fraud entirely is a noble ideal, but not a realistic goal. According to one experienced fraud manager, Sharlene Johnson, Senior Manager VarTec Telecom, Inc., "It's not a question of whether or not you are going to get hit with fraud, it's a question of how much you can lose."

Clearly carriers must spend money on telecom fraud management, and, to a point it is a very good investment. However, companies with successful fraud management processes resist the temptation to over spend, and instead seek out solutions that will effectively eliminate the majority of their fraud, and minimize the extent of their exposure to the occasional loss that does occur.

The goal should be to seek out solutions that will effectively eliminate the majority of fraud. According to Johnson, "When investigating cases, carriers should be aware of the impossible and the improbable. For example if a customer has never placed a call to an international location, the questionable three-hour call may be the first indicator of fraudulent activity. If attention is focused on these types of red flags, a high percentage of telecom fraud can be identified."

Strategic Guideline #3 Common Sense is the Best Weapon Against Fraud

Using common sense principles, telecom fraud management can support corporate strategy and maximizing return on investment.

Experienced, well-trained staff, access to current fraud data, and a powerful fraud management system are important tools in the fraud prevention arsenal. However, the foundation of an effective fraud management process must be built around one simple concept. Over time the ways and means fraudsters gain access to the network may change, but their fundamental operating principles remains the same. Their goal is to gain access to service at no cost so that they can profit from it.

The fraudster who will do the most financial damage to a network, is the organized criminal enterprise seeking to pirate service for resale. Focusing fraud management efforts to address these call sell operations can make the greatest impact to a carrier's bottom line. In fact, concentrating on call sell operations alone, will significantly limit a carriers exposure.

Once thieves find a carrier's weakness they exploit it quickly and aggressively. Knowing that the window of opportunity will close eventually, they will attempt to maximize their revenue. As with any retail operation, this means selling as many units as possible, at the highest price. For the telecom pirate, the units are minutes, and the market sets the price. With dozens of carriers offering low cost domestic rates, there is simply no margin in re-selling pirated domestic service. A combination of economic and social factors dictates that their customers will be calling high-cost international destinations. For most carriers, the greatest exposure to fraud losses comes from call sell operations pirating service to re-sell in the form of multiple, long, international calls to high-cost locations.

It is tempting to take a cavalier attitude towards some types of traffic. Carriers often assume that their contractual relationship with these customers exempts them from responsibility for fraudulent traffic and guarantees them payment whether the calls are legitimate or not. Two prime examples are wholesale customers and retail customers with PBXs.

Often carriers with some or all of their network traffic generated by resellers assert that they have no legal responsibility to monitor the traffic and no financial liability for the traffic if it is fraudulent. Similarly, most businesses with PBX equipment sign waivers releasing their carrier from responsibility for fraudulent traffic generated from their PBX. While the carrier may not have any legal obligation to protect these customers or forgive their debts, if a reseller or PBX customer is hit for fraud, and is unable to pay, the carrier is left to absorb the loss. In recent years there have been numerous examples of resellers and businesses who have suspended operations or filed for bankruptcy leaving multiple creditors (such as wholesale carriers) with significant unpaid bills.

An effective telecom fraud management process should include monitoring wholesale customers and their retail customers. To be effective, monitoring parameters need not be as stringent nor investigative efforts as exhaustive as the carrier would undertake with its own customers. Similarly, all carriers should monitor traffic generated by PBXs.

Finally, it is important to note that just because a carrier has purchased a fraud management system does not guarantee that fraud losses will be minimized. Common throughout the industry are companies who are unable to deploy adequately the fraud management tools they have invested in. Reasons vary, but several themes are common. Often management purchases an expensive fraud management system, with little thought given to the experience and skills of the team that will actually be implementing and using the software. Systems with complex interfaces requiring extensive training to master, that run on sophisticated hardware supported by specialized IT staff, may offer the highest level of fraud prevention. However, if users cannot or do not utilize the tools, the advanced features and functions are useless.

All too often fraud management is an afterthought for carriers. Focused primarily on customer acquisition, there are limited resources and staff to dedicate to fraud management. Vetting new subscribers for credit-worthiness is a low priority, and writing off losses is an expected cost of doing business. A few dynamic companies, however, are recognizing the strategic impact of fraud management, and working to integrate this area into their corporate strategy. By establishing a strong connection between marketing and fraud control, it is possible for carriers to offer new products and improve margins. For fraud control to fully participate in achieving the company's goals, care must be taken to maximize the return on the telecom fraud management investment and to employee common sense in focusing fraud management efforts on the areas of greatest risk.

David West is the Executive Vice President of Equinox Information Systems, a provider of custom and commercial software solutions for the telecommunications industry since 1986.

© Copyright 2001ECTA Review 2001