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Least cost routing is fundamentally flawed

By Prime Carrier

A study of Value Based RoutingTM over Least Cost Routing

The telecom industry today continues to rely on voice for the b ulk of its revenues. The promised new economy has faltered and with it the great bandwidth and IP rush of recent years. This realisation has given the industry its biggest ever challenge - how to make money from voice. This article explores the benefits of using a Value Based RoutingTM algorithm, recently introduced to the market, over the current traditional practice of Least Cost Routing.

Carriers and commentators alike had forecasted the death of voice, to be replaced by Data and VoIP delivery. However, the turmoil seen in the markets since the beginning of 2001 and the res ultant lack of funds has forced carriers to sweat as much return as they can from existing networks and once again look inward for growth and profits. This has already had a profound effect on carrier operations.

Least Cost Routing (LCR) is fundamentally flawed
LCR creates routing plans based purely on lowest rates received with no consideration for capacity constraints to the supplying carriers or quality measures to bench performance. Capacity planning is based purely on the highest volume routes and is either ignored or too complex to manage in advance of sending the routing to the switch.

The result is unplanned overflow which causes serious management issues due to overly optimistic cost plans - the actual costs will always be higher than those expected - creating potentially loss-making routes and an inefficient use of the available network. This is a fundamental flaw in the logic that assumes that the least cost routes are used which is simply not the case.

Today, carriers have to get smarter in dealing with the three core challenges in running an effective and profitable voice business:

1. Improved rate negotiation

2. Complex routing decisions

3. Timely switch update.

Each of these areas on their own will generate significant bottom line savings if managed more efficiently, but when all three are managed together then the savings are even greater. Value Based RoutingTM synchronises and enhances these core activities to create switch routing plans that reflect the optimum use of the current network and existing carrier connections and then immediately updates the switches.

Value Based RoutingTM is the new dimension
Value Based RoutingTM on the other hand automatically considers the cost effect of overflow prior to generating routing plans for the switches. This still takes the lowest rates available from all carriers but more importantly will consider the rates in conjunction with the available capacity to each carrier and use quality parameters before creating the routing plans.

Value Based RoutingTM is shown to improve bottom line profitability by over 200% by just using the same network and the same rates.

To explain this, we will use a simplified example:

Take 3m minutes carried by 3 suppliers. Each supplier can carry 1m minutes of capacity to any destination. In this case the traffic requirement is 1m minutes to Sydney, 1m minutes to Tokyo, and 1m minutes to Taipei.

Least Cost Routing will generate the following routing plan.

Destination 1st Choice 2nd Choice 3rd Choice
Sydney Carrier A 100% @1c Carrier B 0% @ 2c Carrier C 0% @ 10c
Tokyo Carrier B 100% @1c Carrier A 0% @ 3c Carrier C 0% @ 4c
Taipei Carrier A 100% @1c Carrier B 0% @ 2c Carrier C 0% @ 9c

The expected cost for this plan is $30,000 based on the 1st choice routes. However, in reality, the best case cost for this plan will be $106,450, or three times the expectation, due to overflow on the network.

The overflow is caused because A is in 1st Choice for Sydney and Taipei. Therefore the switches will attempt to send Carrier A 2m minutes resulting in 50% overflow of each destination to the next carrier in the table.

However, Carrier B, is the 2nd choice for these destinations and is also 1st choice for Tokyo. Therefore, B will receive 2m minutes of traffic for all the destinations and also overflow to the next choice. In the end, the traffic allocation will look like this:

Destination 1st Choice 2nd Choice 3rd Choice
Sydney Carrier A - 39% @1c Carrier B – 28% @ 2c Carrier C – 33% @10c
Tokyo Carrier B – 22% @1c Carrier A – 45% @ 3c Carrier C – 33% @ 4c
Taipei Carrier A – 39% @1c Carrier B – 28% @ 2c Carrier C – 33% @ 9c

  Expected Costs Actual Cost
Sydney $10,000 $ 42,740
Tokyo $10,000 $24,300
Taipei $10,000 $39,410
Total $30,000 $106,450

Value Based RoutingTM, by using 'Full Look Ahead' capabilities, considers the implications of the capacity constraints and quality, as well as rates before generating the routing table.

The results of this are shown below.

Destination Carrier Rate Expected Actual
Sydney B 2ppm 20,000 20,000
Tokyo C 4ppm 40,000 40,000
Taipei A 1ppm 10,000 10,000
    Total 70,000 70,000

Prime Carrier's Value Based RoutingTM considers not just destinations, rates and capacity but also quality measures, types of service, trunks, switches, time-of-day, and much more to give a network routing plan that far surpasses anything that can be created by evaluating single switches or destinations.

An interesting comparison can be drawn between the telecoms business today and the PC industry of the 1990's. As unit prices continue to fall, suppliers have to maintain and grow revenues by increasing volumes or adding additional services. This in turn creates the need for greater efficiencies in the supply chain. More efficient procurement, greater network optimisation and accurate margin management are the order of the day. Just as Dell reigns supreme in controlling and understanding these issues in the still competitive PC industry of today, carriers need to understand and maximise their supply chain to retain competitiveness going forward.

In short, voice hasn't gone away and is still very much a core business for carriers. This will continue to be the case for the foreseeable future. Those carriers who adopt Value Based RoutingTM early will be the best positioned to win in the ever-competitive telecoms market of the future.

Value Based RoutingTM is a trademark of Prime Carrier Limited © 2003

For more information, please contact:

Elaine Ryan

eryan@primecarrier.com

Tel: +353 1 4100662


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