case study iv-2

CASE STUDY IV-2

Teletron, Inc.: Using InformationTechnology to Transform a Company

“Come on in, guys,” said Timothy C. Lybrook, founder and chiefexecutive officer of Teletron, Inc., a Bloomington, Indiana,provider of telecommunications expense management ser-vices for corporate telecommunications users. It was April 25,1999, and Teletron was considering the implementation of anew strategy to grow the company from about $10 million insales to about $100 million, in part through the use of informa-tion technology.

“Thanks,” replied Robert N. Jonas, director of informationtechnology at Teletron, and Dennis M. Kirin, vice president ofclient services at the company, simultaneously, as they enteredTim’s office.

“We want to show you the plans for the development ofVirtual Analyzer and get your approval,” said Bob.

“The investment will not be small, but the benefits arehuge,” said Dennis.

“OK,” said Tim. “I am anxious to see your analysis and plan.As you know, this is one of the three legs in the transformationof our company. We gotta get it right.”

Expense Management in theTelecommunications Industry

In 1999, there were approximately 6,000 telecommunicationsproviders in the United States. However, only about 45 compa-nies accounted for approximately 95 percent of the dollarvalue of the telecommunications services provided. Theproviders signed their customers to various plans or contractsthat carried costs for specific services. The providers theninvoiced the users each month.

Traditionally, telecommunications invoices from providerswere sent to customers on paper—thick stacks of paper for

Copyright © 2003 by Daniel W. DeHayes. This case study wasdeveloped by Professor Daniel W. DeHayes at Indiana University withthe assistance of R. Jase McQuivey. It is intended to facilitate class-room discussion and is not intended to demonstrate either good orpoor administrative practice. Some names, dates, and figures havebeen disguised.

large corporations. Often, these invoices contained internalprovider codes that offered little explanation of their exactmeaning. Customers were forced to determine what eachcharge on the invoice was for and to compare the charge totheir particular plan or contract. Needless to say, this situationmade the process of verifying invoices very time-consuming forthe customer. As a result, many corporations merely acceptedthe invoice as accurate. Even checking invoices sent electroni-cally was very difficult.

Surveys of corporate telecommunications managers oftenshowed major dissatisfaction with the providers’ billing practices,especially about errors that seemed “always in the favor of theprovider.” Most customers believed that these billing overchargesoccurred because of poor record-keeping by the provider, com-plexity of the contracts, inadequate operational support systemsat the provider, lack of time by the customer to verify theinvoices, and internal miscommunication within either organi-zation. These mistakes were considered by most telecom-munications managers to be significant—telecommunicationsexpenses were often rated as the fifth or sixth largest expenseitem in corporations, and were growing rapidly.

The size and complexity of the telecommunicationsexpense problem increased significantly during the 1990s, andwas forecast to grow significantly during the first decade of thenew century. Additional services, such as broadband technol-ogy, were enabling enterprises to transfer vast amounts of digi-tal information rapidly. In addition, cell phone use by corporatecustomers grew rapidly during the 1990s and was forecast togrow substantially in the new century as well. Finally, the oldvoice-centric telecommunications infrastructure was beingreplaced with new service offerings that combined voice, data,and video using the Internet Protocol (IP).

According to Gartner-Dataquest, an industry tracking firm,total telecommunications spending by the business market wasestimated to grow to $175 billion in 2000 and continue toexpand rapidly to over $350 billion by 2005. One reason givenfor this rapid growth was that many corporations recognized thattheir telecommunications infrastructure was critical for their com-pany’s revenue growth. Yet the cost of errors in operating thisinfrastructure could well be greater than the revenue benefits.

658

M17_MART9548_06_SE_CSIV.QXD 1/22/08 3:57 PM Page 658

Case Study IV-2 Teletron, Inc.: Using Information Technology to Transform a Company 659

The expense management environment, characterized bynumerous service offerings, frequent errors in billing, and mul-tiple telecommunications providers, created a significant oppor-tunity for service firms to assist enterprises in realizing cost sav-ings and operating efficiencies. Most corporate customers didnot consider telecommunications expense management to bea core competency. They typically did not possess the time,expertise, and access to the necessary information that wouldenable them to analyze their telecommunications bills in-house for accuracy or to investigate money-saving opportunities.According to a recent research report, procuring telecommuni-cations services was “a pain for everyone.” The researchersconcluded that companies of all sizes were unhappy at everystage of the telecommunications procurement process, fromordering to installation to billing.

In the late 1990s, several experts recognized an opportunityfor service firms with expertise in telecommunications billing toreview complicated invoices from several providers (each withdifferent codes) for accuracy as well as searching for and nego-tiating the lowest prices and the highest quality service for acorporation. Furthermore, these experts forecast a large incre-mental market opportunity for such firms that would gobeyond traditional outsourcing to provide software tools thatwould empower enterprises to analyze easily and proactivelytheir telecommunications services.

Company History

In the 1980s, Tim Lybrook was working as a consultant to theresort industry. His business took him to a variety of resortoperations across the United States. As part of his work, hereviewed how his clients were spending their money. Whilereviewing the cost structure of his clients, Tim often noticedinaccuracies in their telephone bills. Resort operators were con-sistently being overcharged for their telecommunications ser-vices, often by as much as 30 percent.

After seeing this situation existing for several customers, Timwondered if there was a business opportunity there. During1990–1991, Lybrook investigated several other industries andfound that the same problem existed. Companies were rou-tinely overpaying their local, long distance, data, and wirelessproviders. These overpayments were due to the complexity ofthe bills, the size of the organizations, the diversity of services,and errors of the service providers. So in 1990 Lybrook incor-porated Teletron to assist “companies throughout the UnitedStates to reduce their telecommunication expenditures byidentifying inefficiencies and errors in their phone bills.” He fin-ished a business plan in late 1991, and Teletron started hiringemployees in February 1992.

Teletron targeted customers in the United States that spentbetween $10,000 and $500,000 per month on telecommuni-cations services. An inside Teletron salesperson would call the

telecommunications manager, and propose that Teletron auditthe company’s last 12 months of telecommunications invoices.If Teletron found errors and had them corrected, Teletronwould receive 50 percent of the savings. If no savings werefound, the company owed Teletron nothing. A typical proposalcall went something like:

Mr. Jones, I am Mary Johnson with the Teletron Corporation. Weare a telecommunications expense management firm located inBloomington, Indiana. In our work with clients, we have discov-ered that over 95 percent of the telecommunications billsreceived from carriers or providers contain errors, often in theprovider’s favor. Have you ever seen that problem? . . . I thoughtyou might have. We provide a no-risk service for our corporateclients—you send us your telecommunications bills for last month.If we find errors in the bills, we will contact the carriers and getthem to send the rest of the past year bills. When we correct theerrors, you pay us 50 percent of the documented savings. If wedon’t find anything, you owe us nothing. Therefore, our service isrisk-free to you. Would you be interested in talking further?

Teletron then assigned the client to an account managerwho in turn often used former telephone company personnelto conduct manual audits of the provider bills. The companymaintained a library of relevant telecommunications contractsand tariffs against which the auditors would compare the bills.When errors were found, the Teletron auditor contacted thebilling personnel at the telecommunication provider andworked with the provider to adjust the bill. When all the billswere audited, Teletron compiled the savings and invoiced theclient for its fee. Teletron personnel also attempted to identifybetter plans or contracts for their clients. If future savings couldbe achieved by the client by implementing one of their sug-gestions, Teletron invoiced the client for a share of the next12 months of savings.

After the initial engagement with the client, Teletron person-nel attempted to build a longer-term relationship with theclient, auditing their bills on an ongoing basis. But clientsaccepted this additional service very rarely. Most client engage-ments lasted from 6 months to a year. New clients had to besolicited on a continuing basis.

Lybrook considered the core competencies of Teletron tobe its ability to interpret telecommunications bills, find errors,compare contracts and tariffs with current invoices, and effec-tively deal with telecommunications providers. He consideredthis expertise to apply equally well to the local, long distance,wireless, Internet, and data markets.

Teletron faced strong competition from a few larger firms andhundreds of “mom-and-pop” operations. However, there wasno company that held more than 1 percent of the market. Mostfirms that audited telecommunications invoices were smalloperations, usually owned by a retired telephone companyemployee who knew contracts. Others were captives of certain


660 Part IV The Information Management System

service providers. Likewise, some telecommunications depart-ments of user companies offered to audit the telecommunica-tions invoices of other companies as a way to earn revenue.

Most competitors were privately held. Several of these pri-vately held companies had grown to significant size. They were:

• Cost Management Consultants: This companyassisted clients in making decisions regarding bothenergy and telecommunications costs. The companyperformed both energy and telecommunications invoiceaudits.

• Optimizers: Optimizers helped midsize businessesmanage telecommunications expenses via invoice audit-ing, selecting and integrating telecommunications equip-ment, providing telecommunications management advice,and negotiating rates for telecommunications needs.

• Teledata Control, Inc.: TCI specialized in providingcost control solutions for voice, data, and informationservices. The company offered invoice auditing among arange of other services. In 1999, TCI had approximately$7 million in revenue and employed 93 people.

Teletron was very successful in its strategy from 1992–1998,amassing over 5,000 clients that ranged from small businesses

to Fortune 500 companies. Exhibit 1 contains a map of whereTeletron’s past and current customers were located in 1999.Exhibit 2 shows a selected list of past and current clients as ofDecember 1998.

In addition to serving many well-known clients, Teletron wasgenerally successful from a financial standpoint, achieving acompounded revenue growth of more than 200 percent from1992 through1998. In addition, Teletron maintained EBITDAmargins on revenue in the 10 to 30 percent range during thisperiod. See Exhibit 3 for the financial results of Teletron during1992–1998.

Despite the financial success, in 1998 Lybrook began toquestion whether the company could continue to grow underits current business model. The company experienced over 90percent yearly customer “churn,” requiring a costly ongoingcustomer acquisition process. As carriers corrected their billingmistakes, many of Teletron’s customers felt that they no longerneeded Teletron’s services. Other customers hired a person forfinding billing errors so as to keep 100 percent of the savingsrather than splitting the savings with Teletron. In addition tochurn, Lybrook recognized that the auditing process was alabor-intensive operation. While the process of searching thecontracts for the correct charge for a particular customer could be

423

Total Clients = 5,246Source: Company records.

69

88

12

419

28

104

3361

16

16

105

30

51

22

88

38

88

136

136

184

428

64

256

69

14 29 249

81

68

219

164

2

17

Connecticut……….Delaware…………. 10Maryland………… 29Massachusetts……. 190

Rhode Island……..Vermont…………..Washington, DC….Alaska……………. 3

Hawaii……………. 4

310

3361

70

99

210

209

2

17

18

New Hampshire…. 16New Jersey……….. 132

10188

Canada…………… 7

96

EXHIBIT 1Location of Clients in 1999 Teletron, Inc.



taught, automating the process would require significant effort.In mid-1998, Lybrook began to wonder how to keep customerslonger and how to automate some of his internal processes.

A New Business Model

By the end of 1998, Lybrook decided that he wanted to growthe company to become a $100 million business by 2006. Hewas no longer interested in owning just a “lifestyle” business.He also felt that the existing business model, while profitable,was not scalable to that level. Finally, he believed that merelyautomating some of Teletron’s processes would not result in a

profitable $100 million operation—labor costs grew too rapidlyas sales increased.

At the January 5, 1999, board of directors meeting, Lybrookpresented his new vision for the company. He saw Teletronacting as an intermediary between the providers of telecom-munications services and the users of those services. Teletronwould help its clients (the users) solve problems, whateverthey were. His conversations with many corporate telecommu-nications managers convinced him that while minimizinginvoicing errors and seeking better contracts for customerswere important, they were not the only problems these cus-tomers had. Teletron would continue to offer consulting and

Marconi Medical Shell Oil Masterbrand/Schrock

BMW North America Epsilon Harland Financial

North American Mortgage AGI Klearfold Kohl’s Department Store

Saint Mary’s SMDC Humana La-Z-Boy Chairs

Relizon Disney Stores Talbots

LaQuinta Inns Dollar General Corp. Red Roof Inns

Earthlink Bungee

Source: Company records.

EXHIBIT 2Examples of Past and Current Clients Teletron, Inc.

Year Revenue (in $000) EBITDA (in $000) EBT (in $000) Headcount

1992 $14 $(115) ($115) 4

1993 76 (143) (143) 4

1994 253 26 26 4

1995 557 106 106 12

1996 1,636 345 345 35

1997 4,107 1,122 1,134 62

1998 7,268 904 854 157


EXHIBIT 31992 to 1998 Financial Results Teletron, Inc.



auditing services to clients but would now provide a softwareproduct to its clients on a subscription basis.

In order to achieve his vision, Lybrook proposed to theboard that three major transformations take place at Teletron.First, the senior management in the company who reported toTim should be replaced. Teletron needed senior managementwho had been successful in $100 million companies. Timimmediately hired a new vice president of client services.

Exhibit 4 contains brief biographies of the key managementteam at Teletron as of April 1999.

Second, Tim proposed the creation of a new, complexpiece of software (called Virtual Analyzer) that could be deliv-ered from Teletron’s server in an application service provider(ASP) mode. He believed that the ASP delivery vehicle wouldbe more acceptable to the client than licensing the software.He reasoned that most telecommunications users did not want

Timothy C. Lybrook is Teletron’s chairman and chief executive officer. Prior to founding Teletron, he spent 14 years as a consultant in the resort industry, where he implemented call centers, established sales teams, marketed trade shows, developed direct mail programs, and created strategic alliances/partnerships. He founded Teletron in 1990 to take advantage of the inefficiencies in the telecommunications industry which he witnessed in the resort industry. Mr. Lybrook serves on the board of directors for the Bloomington Economic Development Corporation and the Greater Bloomington Chamber of Commerce.

William L. Bennett is vice president of finance. He brings more than 7 years of diversified corporate financial experience to Teletron. His background includes work in several positions, ranging from financial analyst to controller to director of financial planning. Mr. Bennett has been instrumental in supporting Teletron’s financial initiatives through its past rapid growth, with sound financial planning and responsible cost management. Mr. Bennett is a CPA.

Mary Ellen Pastor is director of human resources. Mary Ellen provides Teletron with human resource strategies acquired during her 10 years of experience in the telecommunications industry. Ms. Pastor manages recruitment, employee relations, compensation and benefits, and organizational development for Teletron.

Robert N. Jonas is director of information technology. Bob brings technology, business,and leadership skills to Teletron’s information technology division. In Mr. Jonas’s 16 years of experience, he has held positions as systems analyst, manager of telecommunications, and director of systems development for a series of privately-held companies in the Midwest.

Charles A. Bentley is director of sales. Chuck has more than 13 years of sales executionand leadership in the telecommunications and high technology industries. Most recently, he was the vice president of sales and business development for a Silicon Valley startup. Prior to that, Chuck was a regional sales director, where he increased sales by an averageof 16 percent over 5 years.

Dennis M. Kirin joined Teletron in February of 1999. He brings to Teletron more than 10 years of customer service, information technology, and operations management experience. He has designed, built, and managed multi-vendor customer service, training, and maintenance operations for both large and small businesses and is experienced in new products and services, pricing, business models, and operational infrastructure. Mr. Kirin leads Teletron’s client services department where his focus is on creating clients for life.


EXHIBIT 4Biographies of Key Management Staff Teletron, Inc.



the upkeep responsibilities of a complex piece of licensed soft-ware. This software product had to have a great deal of knowl-edge imbedded in it, reflecting what highly experiencedTeletron employees had formerly done.

Third, Tim knew that he had to change the entire cultureat Teletron, especially the way the company went to market.While past growth was impressive on a percentage basis,Teletron needed large increases in dollar revenue to reachthe target of $100 million by 2006 from an existing $7.3 mil-lion level. In particular, the sales process had to change drasti-cally. From 1992 to 1998, Teletron used a cadre of insidesalespeople to sell a service directly to many clients, most ofwhom did not continue as clients after the initial engagement.This effort had to be replaced with a process that developedlong-term relationships in which clients would subscribe to asoftware solution developed by Teletron that resided onTeletron’s server. The size of the call center would be reduced.Different kinds of salespeople would have to be hired—thosewho could sell complex software to clients not used to buyingit. New channels to reach the customer would have to bedeveloped.

Making the New Business Model a Reality

Creating a new software package became a major part ofimplementing the new business model for Teletron. OnFebruary 10, 1999, Lybrook assigned the director of informa-tion technology, Robert N. Jonas, and the newly hired vicepresident of client services, Dennis M. Kirin, to co-chair a taskforce that would design a new system. Their day-to-day dutieswere to be delegated to someone in their unit. In his memo,Tim laid out the following goals for the new system:

• Expand the range of services that Teletron provided.

• Allow the client (purchaser of the software) to managehis telecommunications environment efficiently andeffectively.

• Meet the broad range of needs of the telecommunica-tions manager in corporations.

Tim asked for a proposal by the end of April 1999. WhenBob and Dennis returned with their proposal, Tim opened themeeting by saying:

Thanks for putting all your effort into this project. I realize thatyou have had to perform double duty for the last 2 months.Even though I asked you to delegate your day-to-day responsi-bilities to someone else, I know that you still had to run yourshop as well as lead this task force. And, Dennis, you were new!But you and I both know that this system is very much the fu-ture of the firm. Rather than listen to a formal presentation, letme ask you some questions. Let’s start with the size of the mar-ket we can go after. Dennis?

Dennis replied,

There is some good news here. The market is huge. Gartner-Dataquest estimates that the addressable telecommunicationscost management market will grow from a little under $2 billionnow to over $5 billion by 2005, a 26 percent compound annu-al growth rate. With no dominant player in the market, this mar-ket is largely underserved. If we capture just 5 percent of thatmarket, we are talking about a huge sales opportunity. We caneasily grow to your $100 million revenue goal in 7 years. Andcost management is only one part of the functions that VirtualAnalyzer will provide our clients.

“Outstanding! I knew the potential was large, but I had noidea that it was that large,” said Tim. “But, let me ask you . . .what does your market research show has to be included in asoftware offering to meet customer needs?”

Bringing up his PowerPoint presentation, Dennis responded,

Let me first describe our research process. We first pulled1,200 company names of current and past clients from ourdatabase. We then designed a four-page questionnaire thatasked some questions about their satisfaction with our currentservices and asked about their needs. The questionnaires weresent to telecommunications managers in medium- to large-sizecorporations. We got 157 usable responses out of the 1,200questionnaires sent.

Basically, there are six needs. The first is inventory man-agement. They all have a massive problem determining theequipment and features installed in every part of their telecom-munications environment. They want a way to keep track of allof the telecommunications services used at each site. Theseservices include the features, the service provider providing theservice, the accounts that the service provider bills for the ser-vice, and the equipment used to provide the service.

Second, they want better access to the provider plans andcontracts the company is using. Currently, most customers donot have a central database for this kind of information. Inshort, they don’t know exactly what they are buying. They uselots of providers, each with many different plans or contracts.And they want to receive this information electronically. Theyargued that in order to realize any significant cost savings, a cus-tomer must first understand exactly what plans and servicesthey are subscribing to and the extent of their usage of thattelecommunications service. For example, many large compa-nies do not take the time to review their paper bills to deter-mine what their long distance charges are to a particular stateor country. This is primarily due to the sheer size of their paperbills and the complexity of those bills.

Third was expense management. This is our traditionalarea of expertise. Even if the customer can organize all theirtelecommunications data, there is still a level of expertise that isneeded to analyze the data fully, and thereby realize significantcost savings. While some companies seem to have this solvedby hiring people to do the auditing or by using our service orthe services of one of our competitors, most still believe that

M17_MART9548_06_SE_CSIV.QXD 1/22/08 3:57 PM 63


they are missing lots of opportunities here. In addition to find-ing problems in current bills, the customers want help in rec-ommending changes to existing plans and services.

Fourth, our customers need help in vendor invoice process-ing and payment. They need to collect all the bills for analysisfirst. Once they have analyzed the bills, the company wants to beable to send the corrected bills to accounts payable to issue pay-ment. Obviously, they need to do this for each vendor. Manyneed an interface to the company’s accounts payable system.

Fifth, they still have the old standby needs—moves, adds,and changes. Given all the organizational change in our cus-tomers these days, services at a particular site change very fre-quently. They may install a T1 line today only to have itremoved in 2 months because the demand at that site haschanged significantly. The customer needs a central point ofcontact for making these changes and providing oversight ofthe day-to-day duties to make sure the move, add, or changeoccurs on the most economical basis. It would be great if thechange were then updated in the overall inventory list oftelecommunications services.

Finally, they expressed a need for some analytical capabil-ity. Some of the reports they want include usage studies, ser-vice assessments and recommendations, market comparisonswith other companies to determine if they are getting a goodrate, vendor analyses to see if they have the best set of ven-dors, and risk assessment.

“OK, that is a good list. I am not surprised by any of thoseneeds,” replied Tim. “But will they buy a commercial softwareproduct to help them manage these issues? Or will they havetheir internal systems development department design ahome-grown system? Or maybe they will just continue to do itmanually? Or use an outside service?”

“Let me handle that question,” replied Jonas.

We specifically asked that question in the survey. The first thingthat we found is that there is no way that they can get enoughstaff to perform these functions manually. Most have had staffcuts. And while the telecommunications managers would gen-erally like to have an internal system tailored to their specificneeds and processes, they are ready to buy a piece of com-mercial software. They recognize that with all the Y2K issuescapturing the attention of their information technology depart-ments now, they are not going to be successful in getting sucha system designed internally. And even when the Y2K issues goaway, there is going to be such a backlog of other demandsthat they don’t think they will be successful in getting a systemwritten any time soon.

“I sure hope you are right,” replied Tim. “The people I amtalking to tell me that acquisition of anything that is not Y2Krelated is being delayed. Of course, this product won’t be outfor 2 to 3 years so maybe that is not a big worry. Tell me, arewe the first company to think of this idea or are there competi-tors out there with software packages they offer to telecommu-nications managers?”

“Well,” replied Bob. “We’re not the first, but I think that wecan be the best. We found five companies that seemed to rep-resent real competition. If we look at this chart, they are:

• QuantumShift: QuantumShift operates a B2B e-commerce business model focusing on outsourcingand cost management. It has an Internet platform called“InterAct” that uses the Internet to automate and accel-erate the telecommunications supply chain. Quantum-Shift also has a professional services team to assistclients with telecommunications equipment selection.The company has recently secured approximately $110million through three rounds of venture financing, and its revenues are in the $15 to 20 million range. UnlikeTeletron, most customers do not see QuantumShift asvendor-neutral as it markets telecommunications ser-vices to its customers.

• Tenet International: Tenet is a small, independent, costmanagement service provider. It helps clients control andmanage telecommunications expenses through financialanalysis and customer service support. Tenet can trans-mit information with a customized feed to the clientbased on client specifications. Tenet also offers Web-based management and control reports in addition to avendor payment service. The company’s revenues areestimated to be in the $1 to 5 million range.

• Simplexity: Simplexity is an Internet-based trading hubwhere buyers and sellers of telecommunications servicescan connect and transact with each other. It targets abroad spectrum of customers ranging from home-based,small, and medium-sized businesses, to telecommunica-tions carriers. Simplexity seeks to help its customerscompare and select the best products, plans, and serviceproviders. Simplexity recently raised $53.5 millionthrough three rounds of venture financing. The companyhas approximately $7 million in revenue and employsabout 90 people.

• Intera Communications: Intera’s Smart Partner platformprovides solutions for managing its clients’ telecommuni-cations services. It offers an online inventory of a client’stelecommunications services, vendors, and equipment.In addition, the client can compare, select, and ordervoice, data, Internet, and wireless services through SmartPartner. The company has approximately $49 million inannual revenues and 150 employees.

• ProfitLine: ProfitLine provides business process outsourcing solutions that manage the life cycle of voice and data services and reduce communicationscosts for enterprise-level companies. These servicesinclude service ordering and optimization, inventory



management, bill management and auditing, accountspayable processing, telecommunications contract negotiations, and project management. Delivery of these services is done via a proprietary Web appli-cation, providing real-time visibility into their outsourc-ing services.”

“Hmm . . . very interesting,” said Tim. “Two out of these fivecompanies recently received venture capital funding . . . and inlarge amounts. If we can develop something better, maybe wecan go to the VC market as well. But that is for later . . . after wedecide if we want to develop this package or not. Tell me, givenall the competition out there, is what we are planning any bet-ter than the others? Or are we just being a ‘me too’?”

“We figured that you might ask that question,” repliedDennis. “We were able to inspect each of the competingproducts. From that process, we prepared a comparisontable (Exhibit 5) that shows what each of these offerings cando compared to what we are planning to put in as featuresand capabilities of Virtual Analyzer. As you can see from thetable, Virtual Analyzer will be the best offering in this market.It looks to us that Tenet is our most robust competitor, butit is targeting a different size market and the company ispretty small.”

“I’m impressed so far,” said Tim. “But let’s discuss what youare proposing that Virtual Analyzer actually be able to do. Whatis the functionality you see in the product?”

“OK,” said Bob. “Let’s answer that question three ways:”

First, Virtual Analyzer will have six major modules correspondingto the needs we found in the market. They are Client InformationManagement; Move, Add, and Change Processing; VendorInvoice Processing and Vendor Invoice Payment; InvoiceAnalyzer; Rate Optimizer; and Industry Information Management.

Second, Virtual Analyzer provides six primary reporting andanalysis capabilities. Let me define each one:

1. Inventory management reports show the exact telecom-munications services used at each site, including the exactfeatures, the service provider, and any other tracking infor-mation desired by the client.

2. Detail tracking reports provide data on costs by site,service provider, and user-defined categories.

3. Cost allocation reports show cost by site, service, serviceprovider, and user-defined categories. Our clients will usethis report to charge back costs to groups within theirorganizations.

4. Usage allocation reports provide the client with a flexi-ble way to allocate usage to projects or entities in


TeletronQuantum-

ShiftTenet

InternationalSimplexity Intera

Profit- Line

Service Offerings:

Cost Management Yes

Yes

Yes

Yes

Yes

Yes

Yes

No

Some

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Likely

Yes

No

Yes

Yes

Yes

Some

Yes

Yes

Yes

Yes

Some

Yes

Bill Optimization

Bill Management

Full Service

Inventory/InfrastructureManagement

Target Market Medium toLarge

Medium toLarge

Small toMedium

Residential,SOHO, Medium,

Carriers

Small toMedium

Small toMedium

Internet Capability Full Nearly Full Nearly Full Some Nearly Full Some

Name of Platform VirtualAnalyzer

InterAct CopyrightedASP Software

N/A Smart Partner BillManagement

Company

EXHIBIT 5Comparison of Virtual Analyzer to its CompetitionTeletron, Inc.



case they want to study the actual cost of a project ororganization.

5. Trend analysis reports track usage and cost trends by avariety of dimensions, allowing the user to detectabuses and areas for improved services.

6. Variance analysis reports identify any significant changesin cost or usage measures.

Through these capabilities, our clients will be able to gen-erate many unique and customizable reports. They can createreports based on certain factors they define and produce a re-port that is specific to their individual needs. The software will

reside on our server here in Bloomington. We will be linkedelectronically to the carriers or providers as well as our clients.As clients update their database, the system will automaticallycontact the carriers for adjustments. Likewise, when there is anew contract or an invoice for one of our customers, the carrierwill send it electronically to us, and Virtual Analyzer will updatethe customer’s database.

Third, there is a more detailed and technical description ofthe features and capabilities of each major routine in the soft-ware being designed. If you are interested, I have a handout onthe capabilities of each of the major routines. (See Exhibit 6.)

EXHIBIT 6Virtual Analyzer’s Features and CapabilitiesTeletron, Inc.

Client Information Management—Reports and Analysis

Client Information Management

The Client Information Management System collects, processes, and presents all of a client’s telecominformation. This includes all of the services they use, who provides the service, locations where theservices are used, what equipment is used to provide the service, how much it costs, and how it is used.

Data Acquisition Cost and usage data are acquired from service providers in three ways: EDI, CD, and from paperbills. EDI is the preferred mechanism and will be used whenever possible. CD data will be usedwhen EmDI is not available. Paper bills will be used when they are the only available source.

Data Processing When the data has been collected, it is processed. Processing includes aggregation and allocation ofcost and usage data into user-defined categories based on user-defined time periods.

Inventory Management An inventory of the services used, the providers of the service, the locations where the services are used,and the components (equipment) used to provide the services are maintained in the inventory. The inven-tory provides the basic structure by which all cost and usage information is aggregated and allocated.

Monthly Detail Tracking All of the cost and usage information provided monthly by the service providers is captured andtracked. This includes translating each service provider’s charge codes into standard (Teletron) chargecodes. The data can be presented in the form of a “Teletron” invoice that breaks down the data (costand usage) into easy to read and understandable formats.

Cost Allocation Costs are aggregated and allocated by location, service provider, type of service, type of component,any user defined code, or any combination of these. For example, Virtual Analyzer can aggregate andallocate by service type by location. If locations are assigned a user-defined code for “Office Type,”Virtual Analyzer can aggregate and allocate by service type by office type by type of component, etc.

Usage Allocation Usage is aggregated and allocated by up to 13 categories that include the basic inventory items (loca-tion, service type, service provider, etc.) as well as categories that can be defined by the client. Theseinclude time of day, time of month, length of call, type of call, etc. Each client determines the cate-gories into which usage data are aggregated.

Trend Analysis Trend Analysis is performed and reported on both cost and usage data. The reports will provide theinformation in both words and graphical representations. Trends analyzed will include month to previous month, other time periods (such as quarter to previous quarter and year-to-date to previousyear-to-date), current month to same month of previous year, etc. These reports can be run by location, service provider, service type, user-defined codes, etc.

Variance Reporting Variance Reporting refers to reports that show changes to the client’s information. This includes newaccounts/components, missing accounts/components, changes in charges from one month to the next,changes to the inventory, etc.



EXHIBIT 6 (Continued)

User-Defined Codes Users have the ability to assign codes to locations, services, and/or components. The user defines acategory for each code, identifies the valid codes for each category, and then assigns the code(s) tothe appropriate inventory item. For example, the client may have their locations assigned to“Regions.” They can also assign codes that identify the type of location (sales office, distributioncenter, manufacturing facility, warehouse, etc.).

Chargebacks Virtual Analyzer will create a standard ASCII delimited file that will contain user-specified data forinput into the client’s accounting system.

Move, Add, Change (MAC) ProcessingMAC Processing MAC Processing tracks the processing required for implementing a change. It is an external system

in that it tracks the work done by the service provider and not work done by Teletron.

Online Request Users will input their requests for changes to service through a Web-based request system. This willbe linked to Virtual Analyzer’s inventory so that the user can select the service provider, service,and/or component.

Service Order Creation Service Orders will be created from the MAC Request. Templates will be developed and used foreach type of Service Order. Multiple Service Orders can be generated from a single MAC Request.For example, a client may change its long distance provider from MCI to AT&T. Service Orders arecreated for AT&T, MCI, and every local service provider. The Service Orders created are sent elec-tronically via e-mail or fax to the service provider.

Service Order Tracking The progress of every Service Order issued is tracked. Each Service Order type has milestones associated with it that detail what needs to be done and when it should be done. If a milestone datepasses, the person assigned to manage the Service Order is notified. As each milestone is completed,the system updates the status of the Service Order. The client can view the status of its requests atany time.

Issue Tracking Each issue that arises during the completion of a Service Order is logged. The Teletron employeeassigned to manage a Service Order, the service provider, and the client can communicate throughthe Issue Log.

Update Inventory Virtual Analyzer Inventory will automatically be updated by the MAC system. New servicesrequested will be added to the Inventory. Cancelled services will be marked and tracked until the ser-vice provider has sent the final bill.

Reporting The MAC system will provide multiple reports that will detail information by service provider, bylocation, by type of MAC, by type of service, etc.

Vendor Invoice Processing (VIP) and Vendor Invoice Payment Program (VIPP)VIP/VIPP Processing The VIP/VIPP Processing system presents each invoice to the client. The client determines which

invoice to pay, how much to pay, and when to make the payments. A payment is made for eachinvoice from the service providers.

Account Setup A payment account is set up with the bank that is used to pay the bills for the client. If a serviceprovider accepts electronic payments, the billing accounts are set up for electronic payment.

Payment Authorization The client views each invoice and enters the amount they authorize to pay and when payment shouldbe released. Multiple payments can be authorized for a single invoice.

Money Transfer The money to pay the authorized amounts is transferred from an account in the client’s bank to thepayment account.

Payment Creation There are two ways payments can be made: electronic and check. Electronic payments are transfersfrom the payment account directly into an account specified by the service provider. This is the pre-ferred method of payment. Checks are created and mailed to those service providers that cannotaccept electronic payments. One payment is created for each invoice received.




Payment Tracking The date each payment (electronic or check) is processed is tracked, including the dates the paymentsare created, sent, and cleared in the payment account.

Reporting The VIP/VIPP system has reports that identify the payment accounts, monthly payment log by clientby account, outstanding balances, etc.

Invoice AnalyzerInvoice Analyzer The Invoice Analyzer reviews each invoice against a set of rules that are maintained in a database,

then logs every violation for evaluation by an analyst. The client determines what to do with eachfinding.

Specify Rules The rules used to analyze an invoice are maintained in a database. The rules are developed by theanalysts and can be applied for a specific service provider, type of service, specific billing plan, etc.For example, a rule may be to identify all short calls (i.e., calls that are less than 30 seconds).Another rule may be to identify all long calls (i.e., calls longer than 2 hours).

Review Invoices The main logic of the system is to apply each rule to an invoice. When invoice data are found to vio-late a rule, this is logged in the Findings table. It is possible for a single invoice data item (such as aspecific call) to violate more than one rule.

Analyze Findings The violations identified and logged are summarized for the analyst. An analyst reviews the findingsand determines whether a specific finding is legitimate or not. If legitimate, it is marked as an“opportunity” for a savings or for a credit. Analysts can review aggregate findings or each specificfinding. For example, the review may have found 300 short calls and 25 long calls. All of the shortcalls can be classified as an opportunity at one time. Alternatively, each long call can be reviewedand only those that are questioned are marked as opportunities.

Authorize Findings The opportunities are reviewed with the client. The client authorizes which opportunities to pursueand which ones to ignore.

Savings & Credits Savings and Credits tables are updated with authorized opportunities. The Savings and Credits tableis used to track implementation of the findings.

Generate MACs MACs are generated for the authorized opportunities. Each MAC is for a specific service providerand can contain one or more opportunities. A Teletron analyst determines whether to combine oppor-tunities or to submit them separately. The MAC system is used to track the progress of implementingan authorized opportunity.

Reporting The Invoice Analyzer has reports that identify the findings, opportunities, authorized opportunities, etc.

Rate OptimizerRate Optimizer The Rate Optimizer system maintains a database of Billing Plans with rates. It is used by the Invoice

Analyzer to verify that proper rates were used for an invoice item. It is also used to identify rate plansthat can save money. There are two primary types of Billing Plans that are kept, commercial and private. Commercial Plans are plans that are available to the general public. Private Plans are con-tracts negotiated between a service provider and a company. All Billing Plans must be published.

Database Maintenance The Billing Plans database can be maintained manually. This includes adding new plans, modifyingexisting plans, etc. Notes about specific plans, features, rates, etc. can be made by analysts.

Database Population Most of the data in the Billing Plans database will come from a third party. The system will usethis data to populate and maintain the data. It is able to distinguish data between the third party information and the data entered manually.

Build Billing Plan Profile

Rate Optimizer analyzes the Billing Plans and develops a profile that identifies the services covered,the qualifications to obtain the lowest rates, the probability that the vendor will give discounts, etc.




Build Client Profile Rate Optimizer analyzes a client’s telecom requirements and builds a profile that identifies the services required, the number of sites, components, and the mix of each.

Find Potential Plans Rate Optimizer will match a client profile against the Billing Plan profiles and identify all BillingPlans that are candidates for supplying the services needed at lower cost.

Calculate Potential Savings

For each candidate Billing Plan, the potential savings are calculated. This is done by applying theclient’s profile against the qualifications of the potential plans and usage and calculating the cost ofthe candidate plan.

Reporting Rate Optimizer generates reports on the Billing Plans, including updates, special offers, etc. The primary report identifies potential plans for saving money with the calculated potential savings.

Industry Information ManagementIndustry Information

ManagementThe Industry Information Management system aggregates client telecommunication information intoa database that views the information by industry rather than by client.

Maintain Aggregation Criteria

The primary criterion for aggregation is the industry. There are additional criteria that can be specifiedto further refine the data such as annual revenue, number of employees, geographic region, etc.

Data Aggregation Each client’s data is aggregated into the industry database as specified by the criteria established.Once in the industry database, the identity of the client is lost.

Cost Analysis Costs are analyzed by industry, service type, service provider, component type, time of year, etc., andany combination. It includes calculating average costs by cost category, service type, etc. For example,the average cost of a long distance call by service provider can be calculated.

Usage Analysis Usage is analyzed by industry, service type, service provider, component type, time of day, time ofmonth, time of year, etc., and any combination.

Service Provider Analysis

Service provider analysis includes analyzing what the actual average cost of a call is for a serviceprovider for different volumes of calls (100 per month vs. 5,000 month vs. 10,000 per month, etc.)for calls from different geographic regions. It also includes an evaluation of performance for completingservice orders, annual volume of billing errors, etc.

Trend Analysis The system also analyzes trends in the industry, such as percent of telecom expense by service type,total expenditures, total costs by service type, etc.

Industry Reports Virtual Analyzer will provide both standard industry reports and custom reports requested by serviceproviders, industry analysts, and corporations who want to evaluate their performance against industry standards.


“Maybe later,” replied Tim. “Right now, I’m more interestedin exactly how you are planning to bring Virtual Analyzer tomarket.”

“OK,” replied Dennis. “That is my area, at least for now.While we want the client to use all of the Virtual Analyzer mod-ules as a single package, we will allow some customers to pickand choose among the various services. However, we believethat a customer must at least subscribe to the ClientInformation Management and Vendor Invoice Processing andVendor Invoice Payment modules in order to realize any signif-icant advantages from the Virtual Analyzer system.

“Next,” Dennis continued. “We think that parts of the soft-ware are ‘protectable ’. . . we intend to file a patent applicationwhen we finish the beta test in two years.”

“Great, great . . . tell me how we are planning to price theproduct,” asked Tim. “You mentioned the customers will beable to pick and choose between the various services . . . howis that going to be figured into the pricing?”Dennis explained,

Tim, pricing will be based on the size of the company and thenumber of modules they choose to use. Larger companiesusing only two modules would be charged about two percent



of their monthly telecommunications cost while smaller com-panies using all the modules would be billed around six per-cent of their monthly telecommunications expense. So weexpect our average customer revenue to be about $25,000 permonth which is roughly four percent of their average monthlytelecommunications bill.

“Good,” replied Tim. “Tell me, how do we get to market? Wehave no experience in selling software. What are the channels?”

“We have three choices,” replied Dennis.

We can create a sales force and go after the clients one at atime. Clearly, we will have to do some of that, but it is veryexpensive. Alternatively, we can use our Web site to sell thesoftware. That method is cheap and will work for some clients,but we think that most customers won’t buy our solution byseeing a demonstration package on the Internet. They will wantsomeone to visit them. Finally, we can create a series of chan-nel partners. These are companies who sell complementaryservices, like help desk companies or information technologyconsulting companies. Some examples might be IBM, EDS, andsome of the large accounting firms. We give them a piece ofthe revenue in exchange for their selling the product for us. Ourguess is that we will have to use all three approaches.

“OK. Well done, you guys. Give my thanks to the rest of yourteam,” replied Tim. “You have clearly thought about the issuesfrom our customers’ standpoint. I like what I am hearing. But Ican’t invest money without a return, despite how good an ideawe have here. Have you estimated how much this part of ourtransformation will cost us?”

“Now comes the bad news,” offered Bob.

This is one complex piece of software. I have worked on somebig projects before and this one will be among the most com-plex ones I have seen. We have to imbed the thoughtprocesses our auditing analysts have been using for ten plusyears into computer code. So the analysis time will be signifi-cant. We looked at going outside for the systems developmentwork, but the cost right now is out of sight. And most of theconsultants don’t have any capacity anyway since they are allworking on Y2K problems. So we are going to have to hire ourown staff.

In addition to designing and testing the software itself,there are lots of other costs that have to be considered as partof the investment. We need to buy lots of big servers. And wewill need to translate all the data tables used by the providersin their contracts and invoices into a standard table that oursystem can use. This task by itself will be huge. We found out that AT&T alone has something like 800 different billingsystems—each with a different data structure. Plus what weworked on already—the market research—costs money. Andthe time we are going to spend contacting customersand providers must be considered as part of the investmentas well.

Our best estimate is that the project will take the rest of thisyear, all of next year, and be ready for alpha and beta testing byearly 2001. We should not count on any revenue from VirtualAnalyzer before 2002. Any revenue we get until then will comefrom operating our old business model.

“Yeah,” added Dennis.As this chart (Exhibit 7) shows, we expect the total

investment needed to achieve this transformation will cost

Year Revenue (in $000) EBITDA (in $000) Investment (in $000)

1999 $11,061 $971 $3,173

2000 12,585 1,801 2,838

2001 10,271 1,124 3,382

2002 5,393 (891) 1,000

2003 16,575 5,540 1,000

2004 33,601 15,612 1,500

2005 60,343 27,947 2,000

2006 108,368 49,598 3,000


EXHIBIT 7Investment and Financial Projections for 1999 to 2006Teletron, Inc.



us over $9 million spread out over 1999 through 2001.Plus, we have to count on added costs for enhancements ofbetween $1 million and $3 million each year from then on.That is definitely the bad news. But . . . we think that we candefinitely hit your revenue targets coming from this newbusiness model. Getting to $100 million in revenue withnearly $50 million in EBITDA is really doable. After all, lookat the size of the market. We only need a tiny percent of the$5 billion market to hit our 2006 target revenue.

“That sucking sound you hear is my gasping for air!!”replied Tim. “I had no idea that our transformation wouldcost this much. So . . . you are telling me that to make thispart of our transformation work, we have to spend over $9million. That is quite a load for a $7 million company. Wewill have to raise that money . . . clearly Teletron won’t gen-erate that kind of cash internally.”

Decision Time

“Guys,” said Tim. “Again, let me thank you for your effort on thisproject. I need to consider whether I want to bet this com-pany’s future on this idea. And . . . I have to prepare a presen-tation for the board of directors that includes the return oninvestment from this endeavor for them to consider at its May4 meeting in Bloomington.”

As the two task force leaders left his office, Tim Lybrookbegan to construct his presentation to the board. (See Exhibit 8.)He started by listing some of the benefits of the idea. Tim won-dered what other benefits he was missing. He then started tomake a list of risks. Tim stopped for now. He knew that therewere additional risks he had not yet considered. He had to goto a meeting with the builder of his new building. But he knewthat he had to finish the presentation. Of course, he first had todecide whether he really wanted to go ahead with the project.

Benefits

• A huge market with generally weak competitors.

• A steady revenue stream as an application service provider (ASP)—remember thevalue of an annuity.

• Simple support process as an ASP with all software directly under Teletron’s control.

• Ease of initial installation with no on-site activity since an ASP.

• Ease of software upgrades with no requirement to change client software.

• Simpler and less expensive EDI/XML connectivity to carriers from one site.

• Simple pricing model ($ per month per user for each module subscribed to).

• An ROI of ? percent.

• High barriers to entry—requires expertise and lots of capital.

Risks

• Required reliance on the Internet, but we have no experience using thiscommunications medium.

• Relatively untried concept.

• Market acceptance is subject to a high level of uncertainty and risk.

• Difficulty in predicting future growth rates.

• Sales cycle may be long.

• Excessive length of time until revenue starts flowing from the offering.

• Difficulty in reaching the market—have to use channel partners not under our control.

EXHIBIT 8Preliminary List of Benefits and Risks of Making the InvestmentTeletron, Inc.


case study iv-2

Documents