Establishing cost-based prices for interconnect products and services will almost certainly involve the implementation of long-run incremental Costing (LRIC) techniques. However, long-run incremental costing is in reality little more than an economic concept. Whilst sounding simple in theory, gaining real business advantage from its introduction is a significant challenge for an organisation. This is not least because:
- Even after many years of use, there remains no defined and/or agreed method for its implementation.
- Each aspect of the concept is open to wide interpretation by affected parties. For example:
- o What is meant by the term “efficient operator”?
o How should the increments be defined?
o How should inter-increment common costs be treated?
o How should infrastructure costs be allocated to products where usage varies by time of day and day of week, or indeed by relative priority of one type of traffic over another?
o What constitutes a “reasonable rate of return” for a dominant operator?
- Large amounts of revenue and/or profitability are potentially at stake. As we transition to true Next Generation Networks, even the very existence of today’s incumbent operator might be at stake.
It generally requires a significant culture change at the highest levels of an organisation, particularly when that organisation is a traditional incumbent.
- For its introduction to be a success, the organisation must believe in the LRIC philosophy of continually seeking to understand how the business is evolving and how technology and best working practices are developing. One tangible result of LRIC is the generation and maintenance of what is effectively a second set of accounts, detailing not what the financial situation of the company is, but what it could be and perhaps should be. The two sets of accounts, historic and LRIC (together with the data gathering and analysis required to produce them), can then be used by senior management to assess the current status of the organisation and assist in highlighting important areas where change needs to be introduced.
Looking at it another way, the historic set of accounts represents the starting point of a journey, and the LRIC set of accounts the destination. To make this journey even more challenging, the target destination will evolve year after year and can never actually be reached! This is why LRIC is not, and can never be, a one-off exercise, but should be embraced as part of the organisation’s on-going business planning and change management processes.