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CASE STUDY IV-2 Teletron, Inc.

: Using Information Technology to Transform a Company

Come on in, guys, said Timothy C. Lybrook, founder and chief executive officer of Teletron, Inc., a Bloomington, Indiana, provider of telecommunications expense management services for corporate telecommunications users. It was April 25, 1999, and Teletron was considering the implementation of a new strategy to grow the company from about $10 million in sales to about $100 million, in part through the use of information technology. Thanks, replied Robert N. Jonas, director of information technology at Teletron, and Dennis M. Kirin, vice president of client services at the company, simultaneously, as they entered Tims office. We want to show you the plans for the development of Virtual Analyzer and get your approval, said Bob. The investment will not be small, but the benefits are huge, 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 transformation of our company. We gotta get it right.

Expense Management in the Telecommunications Industry


In 1999, there were approximately 6,000 telecommunications providers in the United States. However, only about 45 companies accounted for approximately 95 percent of the dollar value of the telecommunications services provided. The providers signed their customers to various plans or contracts that carried costs for specific services. The providers then invoiced the users each month. Traditionally, telecommunications invoices from providers were sent to customers on paperthick stacks of paper for

Copyright 2003 by Daniel W. DeHayes. This case study was developed by Professor Daniel W. DeHayes at Indiana University with the assistance of R. Jase McQuivey. It is intended to facilitate classroom discussion and is not intended to demonstrate either good or poor administrative practice. Some names, dates, and figures have been disguised.

large corporations. Often, these invoices contained internal provider codes that offered little explanation of their exact meaning. Customers were forced to determine what each charge on the invoice was for and to compare the charge to their particular plan or contract. Needless to say, this situation made the process of verifying invoices very time-consuming for the customer. As a result, many corporations merely accepted the invoice as accurate. Even checking invoices sent electronically was very difficult. Surveys of corporate telecommunications managers often showed major dissatisfaction with the providers billing practices, especially about errors that seemed always in the favor of the provider. Most customers believed that these billing overcharges occurred because of poor record-keeping by the provider, complexity of the contracts, inadequate operational support systems at the provider, lack of time by the customer to verify the invoices, and internal miscommunication within either organization. These mistakes were considered by most telecommunications managers to be significanttelecommunications expenses were often rated as the fifth or sixth largest expense item in corporations, and were growing rapidly. The size and complexity of the telecommunications expense problem increased significantly during the 1990s, and was forecast to grow significantly during the first decade of the new century. Additional services, such as broadband technology, were enabling enterprises to transfer vast amounts of digital information rapidly. In addition, cell phone use by corporate customers grew rapidly during the 1990s and was forecast to grow substantially in the new century as well. Finally, the old voice-centric telecommunications infrastructure was being replaced 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 was estimated to grow to $175 billion in 2000 and continue to expand rapidly to over $350 billion by 2005. One reason given for this rapid growth was that many corporations recognized that their telecommunications infrastructure was critical for their companys revenue growth. Yet the cost of errors in operating this infrastructure could well be greater than the revenue benefits.

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The expense management environment, characterized by numerous service offerings, frequent errors in billing, and multiple telecommunications providers, created a significant opportunity for service firms to assist enterprises in realizing cost savings and operating efficiencies. Most corporate customers did not consider telecommunications expense management to be a core competency. They typically did not possess the time, expertise, and access to the necessary information that would enable them to analyze their telecommunications bills inhouse for accuracy or to investigate money-saving opportunities. According to a recent research report, procuring telecommunications services was a pain for everyone. The researchers concluded that companies of all sizes were unhappy at every stage of the telecommunications procurement process, from ordering to installation to billing. In the late 1990s, several experts recognized an opportunity for service firms with expertise in telecommunications billing to review complicated invoices from several providers (each with different codes) for accuracy as well as searching for and negotiating the lowest prices and the highest quality service for a corporation. Furthermore, these experts forecast a large incremental market opportunity for such firms that would go beyond traditional outsourcing to provide software tools that would empower enterprises to analyze easily and proactively their telecommunications services.

telecommunications manager, and propose that Teletron audit the companys last 12 months of telecommunications invoices. If Teletron found errors and had them corrected, Teletron would receive 50 percent of the savings. If no savings were found, the company owed Teletron nothing. A typical proposal call went something like:
Mr. Jones, I am Mary Johnson with the Teletron Corporation. We are a telecommunications expense management firm located in Bloomington, Indiana. In our work with clients, we have discovered that over 95 percent of the telecommunications bills received from carriers or providers contain errors, often in the providers favor. Have you ever seen that problem? . . . I thought you might have. We provide a no-risk service for our corporate clientsyou send us your telecommunications bills for last month. If we find errors in the bills, we will contact the carriers and get them to send the rest of the past year bills. When we correct the errors, you pay us 50 percent of the documented savings. If we dont find anything, you owe us nothing. Therefore, our service is risk-free to you. Would you be interested in talking further?

Company History
In the 1980s, Tim Lybrook was working as a consultant to the resort industry. His business took him to a variety of resort operations across the United States. As part of his work, he reviewed how his clients were spending their money. While reviewing the cost structure of his clients, Tim often noticed inaccuracies in their telephone bills. Resort operators were consistently being overcharged for their telecommunications services, often by as much as 30 percent. After seeing this situation existing for several customers, Tim wondered if there was a business opportunity there. During 19901991, Lybrook investigated several other industries and found that the same problem existed. Companies were routinely overpaying their local, long distance, data, and wireless providers. These overpayments were due to the complexity of the bills, the size of the organizations, the diversity of services, and errors of the service providers. So in 1990 Lybrook incorporated Teletron to assist companies throughout the United States to reduce their telecommunication expenditures by identifying inefficiencies and errors in their phone bills. He finished a business plan in late 1991, and Teletron started hiring employees in February 1992. Teletron targeted customers in the United States that spent between $10,000 and $500,000 per month on telecommunications services. An inside Teletron salesperson would call the

Teletron then assigned the client to an account manager who in turn often used former telephone company personnel to conduct manual audits of the provider bills. The company maintained a library of relevant telecommunications contracts and tariffs against which the auditors would compare the bills. When errors were found, the Teletron auditor contacted the billing personnel at the telecommunication provider and worked with the provider to adjust the bill. When all the bills were audited, Teletron compiled the savings and invoiced the client for its fee. Teletron personnel also attempted to identify better plans or contracts for their clients. If future savings could be achieved by the client by implementing one of their suggestions, Teletron invoiced the client for a share of the next 12 months of savings. After the initial engagement with the client, Teletron personnel attempted to build a longer-term relationship with the client, auditing their bills on an ongoing basis. But clients accepted this additional service very rarely. Most client engagements lasted from 6 months to a year. New clients had to be solicited on a continuing basis. Lybrook considered the core competencies of Teletron to be its ability to interpret telecommunications bills, find errors, compare contracts and tariffs with current invoices, and effectively deal with telecommunications providers. He considered this expertise to apply equally well to the local, long distance, wireless, Internet, and data markets. Teletron faced strong competition from a few larger firms and hundreds of mom-and-pop operations. However, there was no company that held more than 1 percent of the market. Most firms that audited telecommunications invoices were small operations, usually owned by a retired telephone company employee who knew contracts. Others were captives of certain

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service providers. Likewise, some telecommunications departments of user companies offered to audit the telecommunications invoices of other companies as a way to earn revenue. Most competitors were privately held. Several of these privately held companies had grown to significant size. They were: Cost Management Consultants: This company assisted clients in making decisions regarding both energy and telecommunications costs. The company performed both energy and telecommunications invoice audits. Optimizers: Optimizers helped midsize businesses manage telecommunications expenses via invoice auditing, selecting and integrating telecommunications equipment, providing telecommunications management advice, and negotiating rates for telecommunications needs. Teledata Control, Inc.: TCI specialized in providing cost control solutions for voice, data, and information services. The company offered invoice auditing among a range of other services. In 1999, TCI had approximately $7 million in revenue and employed 93 people. Teletron was very successful in its strategy from 19921998, amassing over 5,000 clients that ranged from small businesses

to Fortune 500 companies. Exhibit 1 contains a map of where Teletrons past and current customers were located in 1999. Exhibit 2 shows a selected list of past and current clients as of December 1998. In addition to serving many well-known clients, Teletron was generally successful from a financial standpoint, achieving a compounded revenue growth of more than 200 percent from 1992 through1998. In addition, Teletron maintained EBITDA margins on revenue in the 10 to 30 percent range during this period. See Exhibit 3 for the financial results of Teletron during 19921998. Despite the financial success, in 1998 Lybrook began to question whether the company could continue to grow under its current business model. The company experienced over 90 percent yearly customer churn, requiring a costly ongoing customer acquisition process. As carriers corrected their billing mistakes, many of Teletrons customers felt that they no longer needed Teletrons services. Other customers hired a person for finding billing errors so as to keep 100 percent of the savings rather than splitting the savings with Teletron. In addition to churn, Lybrook recognized that the auditing process was a labor-intensive operation. While the process of searching the contracts for the correct charge for a particular customer could be

EXHIBIT 1
Location of Clients in 1999 Teletron, Inc.

88 12 69 28 16 136 33 61 419 105 51 88 38 104 30 423 136 256 428 2 64 69


96 70

17 16 22 88 184 164 209


99 310

219

68 14 81
210

29

249

Total Clients = 5,246 Source: Company records.

Connecticut. 18 Delaware. 10 Maryland 29 Massachusetts. 190 New Hampshire. 16 New Jersey.. 132 Rhode Island.. 10 Vermont.. 18 Washington, DC. 8 Alaska. 3 Canada 7 Hawaii. 4

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

Marconi Medical BMW North America North American Mortgage Saint Marys SMDC Relizon LaQuinta Inns Earthlink Source: Company records.

Shell Oil Epsilon AGI Klearfold Humana Disney Stores Dollar General Corp. Bungee

Masterbrand/Schrock Harland Financial Kohls Department Store La-Z-Boy Chairs Talbots Red Roof Inns

EXHIBIT 3
1992 to 1998 Financial Results Teletron, Inc.

Year 1992 1993 1994 1995 1996 1997 1998

Revenue (in $000) $14 76 253 557 1,636 4,107 7,268

EBITDA (in $000) $(115) (143) 26 106 345 1,122 904

EBT (in $000) ($115) (143) 26 106 345 1,134 854

Headcount 4 4 4 12 35 62 157

Source: Company records.

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

A New Business Model


By the end of 1998, Lybrook decided that he wanted to grow the company to become a $100 million business by 2006. He was 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 merely automating some of Teletrons processes would not result in a

profitable $100 million operationlabor costs grew too rapidly as sales increased. At the January 5, 1999, board of directors meeting, Lybrook presented his new vision for the company. He saw Teletron acting as an intermediary between the providers of telecommunications services and the users of those services. Teletron would help its clients (the users) solve problems, whatever they were. His conversations with many corporate telecommunications managers convinced him that while minimizing invoicing errors and seeking better contracts for customers were important, they were not the only problems these customers had. Teletron would continue to offer consulting and

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auditing services to clients but would now provide a software product to its clients on a subscription basis. In order to achieve his vision, Lybrook proposed to the board that three major transformations take place at Teletron. First, the senior management in the company who reported to Tim should be replaced. Teletron needed senior management who had been successful in $100 million companies. Tim immediately hired a new vice president of client services.

Exhibit 4 contains brief biographies of the key management team at Teletron as of April 1999. Second, Tim proposed the creation of a new, complex piece of software (called Virtual Analyzer) that could be delivered from Teletrons server in an application service provider (ASP) mode. He believed that the ASP delivery vehicle would be more acceptable to the client than licensing the software. He reasoned that most telecommunications users did not want

EXHIBIT 4
Biographies of Key Management Staff Teletron, Inc.

Timothy C. Lybrook is Teletrons 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 Teletrons 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 Teletrons information technology division. In Mr. Jonass 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 execution and 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 average of 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 Teletrons client services department where his focus is on creating clients for life. Source: Company records.

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the upkeep responsibilities of a complex piece of licensed software. This software product had to have a great deal of knowledge imbedded in it, reflecting what highly experienced Teletron employees had formerly done. Third, Tim knew that he had to change the entire culture at 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 reach the target of $100 million by 2006 from an existing $7.3 million level. In particular, the sales process had to change drastically. From 1992 to 1998, Teletron used a cadre of inside salespeople to sell a service directly to many clients, most of whom did not continue as clients after the initial engagement. This effort had to be replaced with a process that developed long-term relationships in which clients would subscribe to a software solution developed by Teletron that resided on Teletrons server. The size of the call center would be reduced. Different kinds of salespeople would have to be hiredthose who could sell complex software to clients not used to buying it. New channels to reach the customer would have to be developed.

Dennis replied, There is some good news here. The market is huge. GartnerDataquest estimates that the addressable telecommunications cost management market will grow from a little under $2 billion now to over $5 billion by 2005, a 26 percent compound annual growth rate. With no dominant player in the market, this market is largely underserved. If we capture just 5 percent of that market, we are talking about a huge sales opportunity. We can easily grow to your $100 million revenue goal in 7 years. And cost management is only one part of the functions that Virtual Analyzer will provide our clients.

Outstanding! I knew the potential was large, but I had no idea that it was that large, said Tim. But, let me ask you . . . what does your market research show has to be included in a software offering to meet customer needs? Bringing up his PowerPoint presentation, Dennis responded,
Let me first describe our research process. We first pulled 1,200 company names of current and past clients from our database. We then designed a four-page questionnaire that asked some questions about their satisfaction with our current services and asked about their needs. The questionnaires were sent to telecommunications managers in medium- to large-size corporations. We got 157 usable responses out of the 1,200 questionnaires sent. Basically, there are six needs. The first is inventory management. They all have a massive problem determining the equipment and features installed in every part of their telecommunications environment. They want a way to keep track of all of the telecommunications services used at each site. These services include the features, the service provider providing the service, the accounts that the service provider bills for the service, and the equipment used to provide the service. Second, they want better access to the provider plans and contracts the company is using. Currently, most customers do not have a central database for this kind of information. In short, they dont know exactly what they are buying. They use lots of providers, each with many different plans or contracts. And they want to receive this information electronically. They argued that in order to realize any significant cost savings, a customer must first understand exactly what plans and services they are subscribing to and the extent of their usage of that telecommunications service. For example, many large companies do not take the time to review their paper bills to determine what their long distance charges are to a particular state or country. This is primarily due to the sheer size of their paper bills and the complexity of those bills. Third was expense management. This is our traditional area of expertise. Even if the customer can organize all their telecommunications data, there is still a level of expertise that is needed to analyze the data fully, and thereby realize significant cost savings. While some companies seem to have this solved by hiring people to do the auditing or by using our service or the services of one of our competitors, most still believe that

Making the New Business Model a Reality


Creating a new software package became a major part of implementing the new business model for Teletron. On February 10, 1999, Lybrook assigned the director of information technology, Robert N. Jonas, and the newly hired vice president of client services, Dennis M. Kirin, to co-chair a task force that would design a new system. Their day-to-day duties were 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 manage his telecommunications environment efficiently and effectively. Meet the broad range of needs of the telecommunications manager in corporations. Tim asked for a proposal by the end of April 1999. When Bob and Dennis returned with their proposal, Tim opened the meeting by saying:
Thanks for putting all your effort into this project. I realize that you have had to perform double duty for the last 2 months. Even though I asked you to delegate your day-to-day responsibilities to someone else, I know that you still had to run your shop 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 future of the firm. Rather than listen to a formal presentation, let me ask you some questions. Lets start with the size of the market we can go after. Dennis?

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they are missing lots of opportunities here. In addition to finding problems in current bills, the customers want help in recommending changes to existing plans and services. Fourth, our customers need help in vendor invoice processing and payment. They need to collect all the bills for analysis first. Once they have analyzed the bills, the company wants to be able to send the corrected bills to accounts payable to issue payment. Obviously, they need to do this for each vendor. Many need an interface to the companys accounts payable system. Fifth, they still have the old standby needsmoves, adds, and changes. Given all the organizational change in our customers these days, services at a particular site change very frequently. They may install a T1 line today only to have it removed in 2 months because the demand at that site has changed significantly. The customer needs a central point of contact for making these changes and providing oversight of the day-to-day duties to make sure the move, add, or change occurs on the most economical basis. It would be great if the change were then updated in the overall inventory list of telecommunications services. Finally, they expressed a need for some analytical capability. Some of the reports they want include usage studies, service assessments and recommendations, market comparisons with other companies to determine if they are getting a good rate, vendor analyses to see if they have the best set of vendors, and risk assessment.

Well, replied Bob. Were not the first, but I think that we can be the best. We found five companies that seemed to represent real competition. If we look at this chart, they are: QuantumShift: QuantumShift operates a B2B e-commerce business model focusing on outsourcing and cost management. It has an Internet platform called InterAct that uses the Internet to automate and accelerate the telecommunications supply chain. QuantumShift also has a professional services team to assist clients with telecommunications equipment selection. The company has recently secured approximately $110 million through three rounds of venture financing, and its revenues are in the $15 to 20 million range. Unlike Teletron, most customers do not see QuantumShift as vendor-neutral as it markets telecommunications services to its customers. Tenet International: Tenet is a small, independent, cost management service provider. It helps clients control and manage telecommunications expenses through financial analysis and customer service support. Tenet can transmit information with a customized feed to the client based on client specifications. Tenet also offers Webbased management and control reports in addition to a vendor payment service. The companys revenues are estimated to be in the $1 to 5 million range. Simplexity: Simplexity is an Internet-based trading hub where buyers and sellers of telecommunications services can connect and transact with each other. It targets a broad spectrum of customers ranging from home-based, small, and medium-sized businesses, to telecommunications carriers. Simplexity seeks to help its customers compare and select the best products, plans, and service providers. Simplexity recently raised $53.5 million through three rounds of venture financing. The company has approximately $7 million in revenue and employs about 90 people. Intera Communications: Interas Smart Partner platform provides solutions for managing its clients telecommunications services. It offers an online inventory of a clients telecommunications services, vendors, and equipment. In addition, the client can compare, select, and order voice, data, Internet, and wireless services through Smart Partner. The company has approximately $49 million in annual revenues and 150 employees. ProfitLine: ProfitLine provides business process outsourcing solutions that manage the life cycle of voice and data services and reduce communications costs for enterprise-level companies. These services include service ordering and optimization, inventory

OK, that is a good list. I am not surprised by any of those needs, replied Tim. But will they buy a commercial software product to help them manage these issues? Or will they have their internal systems development department design a home-grown system? Or maybe they will just continue to do it manually? Or use an outside service? Let me handle that question, replied Jonas.
We specifically asked that question in the survey. The first thing that we found is that there is no way that they can get enough staff to perform these functions manually. Most have had staff cuts. And while the telecommunications managers would generally like to have an internal system tailored to their specific needs and processes, they are ready to buy a piece of commercial software. They recognize that with all the Y2K issues capturing the attention of their information technology departments now, they are not going to be successful in getting such a system designed internally. And even when the Y2K issues go away, there is going to be such a backlog of other demands that they dont think they will be successful in getting a system written any time soon.

I sure hope you are right, replied Tim. The people I am talking to tell me that acquisition of anything that is not Y2K related is being delayed. Of course, this product wont be out for 2 to 3 years so maybe that is not a big worry. Tell me, are we the first company to think of this idea or are there competitors out there with software packages they offer to telecommunications managers?

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management, bill management and auditing, accounts payable processing, telecommunications contract negotiations, and project management. Delivery of these services is done via a proprietary Web application, providing real-time visibility into their outsourcing services. Hmm . . . very interesting, said Tim. Two out of these five companies recently received venture capital funding . . . and in large amounts. If we can develop something better, maybe we can go to the VC market as well. But that is for later . . . after we decide if we want to develop this package or not. Tell me, given all the competition out there, is what we are planning any better than the others? Or are we just being a me too? We figured that you might ask that question, replied Dennis. We were able to inspect each of the competing products. From that process, we prepared a comparison table (Exhibit 5) that shows what each of these offerings can do compared to what we are planning to put in as features and capabilities of Virtual Analyzer. As you can see from the table, Virtual Analyzer will be the best offering in this market. It looks to us that Tenet is our most robust competitor, but it is targeting a different size market and the company is pretty small.

Im impressed so far, said Tim. But lets discuss what you are proposing that Virtual Analyzer actually be able to do. What is the functionality you see in the product? OK, said Bob. Lets answer that question three ways:
First, Virtual Analyzer will have six major modules corresponding to the needs we found in the market. They are Client Information Management; Move, Add, and Change Processing; Vendor Invoice Processing and Vendor Invoice Payment; Invoice Analyzer; Rate Optimizer; and Industry Information Management. Second, Virtual Analyzer provides six primary reporting and analysis capabilities. Let me define each one:

1.

2. 3.

4.

Inventory management reports show the exact telecommunications services used at each site, including the exact features, the service provider, and any other tracking information desired by the client. Detail tracking reports provide data on costs by site, service provider, and user-defined categories. Cost allocation reports show cost by site, service, service provider, and user-defined categories. Our clients will use this report to charge back costs to groups within their organizations. Usage allocation reports provide the client with a flexible way to allocate usage to projects or entities in

EXHIBIT 5
Comparison of Virtual Analyzer to its Competition Teletron, Inc.

Company

Teletron

QuantumShift

Tenet International

Simplexity

Intera

ProfitLine

Service Offerings: Cost Management Bill Optimization Bill Management Full Service Inventory/Infrastructure Management Target Market

Yes Yes Yes Yes Yes Medium to Large Full Virtual Analyzer

Yes Yes No Some Yes Medium to Large Nearly Full InterAct

Yes Yes Yes Yes Yes Small to Medium Nearly Full Copyrighted ASP Software

Yes Yes Likely Yes No Residential, SOHO, Medium, Carriers Some N/A

Yes Yes Yes Some Yes Small to Medium Nearly Full Smart Partner

Yes Yes Yes Some Yes Small to Medium Some Bill Management

Internet Capability Name of Platform Source: Company records.

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5.

6.

case they want to study the actual cost of a project or organization. Trend analysis reports track usage and cost trends by a variety of dimensions, allowing the user to detect abuses and areas for improved services. Variance analysis reports identify any significant changes in cost or usage measures.

reside on our server here in Bloomington. We will be linked electronically to the carriers or providers as well as our clients. As clients update their database, the system will automatically contact the carriers for adjustments. Likewise, when there is a new contract or an invoice for one of our customers, the carrier will send it electronically to us, and Virtual Analyzer will update the customers database.

Through these capabilities, our clients will be able to generate many unique and customizable reports. They can create reports based on certain factors they define and produce a report that is specific to their individual needs. The software will

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

EXHIBIT 6
Virtual Analyzers Features and Capabilities Teletron, Inc.

Client Information ManagementReports and Analysis


Client Information Management Data Acquisition The Client Information Management System collects, processes, and presents all of a clients telecom information. This includes all of the services they use, who provides the service, locations where the services are used, what equipment is used to provide the service, how much it costs, and how it is used. Cost and usage data are acquired from service providers in three ways: EDI, CD, and from paper bills. EDI is the preferred mechanism and will be used whenever possible. CD data will be used when EmDI is not available. Paper bills will be used when they are the only available source. When the data has been collected, it is processed. Processing includes aggregation and allocation of cost and usage data into user-defined categories based on user-defined time periods. 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 inventory provides the basic structure by which all cost and usage information is aggregated and allocated. All of the cost and usage information provided monthly by the service providers is captured and tracked. This includes translating each service providers charge codes into standard (Teletron) charge codes. The data can be presented in the form of a Teletron invoice that breaks down the data (cost and usage) into easy to read and understandable formats. 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 and allocate 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 is aggregated and allocated by up to 13 categories that include the basic inventory items (location, service type, service provider, etc.) as well as categories that can be defined by the client. These include time of day, time of month, length of call, type of call, etc. Each client determines the categories into which usage data are aggregated. Trend Analysis is performed and reported on both cost and usage data. The reports will provide the information 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 previous year-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 refers to reports that show changes to the clients information. This includes new accounts/components, missing accounts/components, changes in charges from one month to the next, changes to the inventory, etc.

Data Processing Inventory Management

Monthly Detail Tracking

Cost Allocation

Usage Allocation

Trend Analysis

Variance Reporting

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EXHIBIT 6 (Continued)

User-Defined Codes

Users have the ability to assign codes to locations, services, and/or components. The user defines a category for each code, identifies the valid codes for each category, and then assigns the code(s) to the 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, distribution center, manufacturing facility, warehouse, etc.). Virtual Analyzer will create a standard ASCII delimited file that will contain user-specified data for input into the clients accounting system.

Chargebacks

Move, Add, Change (MAC) Processing


MAC Processing Online Request 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. Users will input their requests for changes to service through a Web-based request system. This will be linked to Virtual Analyzers inventory so that the user can select the service provider, service, and/or component. Service Orders will be created from the MAC Request. Templates will be developed and used for each 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 are created for AT&T, MCI, and every local service provider. The Service Orders created are sent electronically via e-mail or fax to the service provider. 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 date passes, 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 at any time. Each issue that arises during the completion of a Service Order is logged. The Teletron employee assigned to manage a Service Order, the service provider, and the client can communicate through the Issue Log. Virtual Analyzer Inventory will automatically be updated by the MAC system. New services requested will be added to the Inventory. Cancelled services will be marked and tracked until the service provider has sent the final bill. The MAC system will provide multiple reports that will detail information by service provider, by location, by type of MAC, by type of service, etc.

Service Order Creation

Service Order Tracking

Issue Tracking

Update Inventory

Reporting

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 each invoice from the service providers. A payment account is set up with the bank that is used to pay the bills for the client. If a service provider accepts electronic payments, the billing accounts are set up for electronic payment. The client views each invoice and enters the amount they authorize to pay and when payment should be released. Multiple payments can be authorized for a single invoice. The money to pay the authorized amounts is transferred from an account in the clients bank to the payment account. There are two ways payments can be made: electronic and check. Electronic payments are transfers from the payment account directly into an account specified by the service provider. This is the preferred method of payment. Checks are created and mailed to those service providers that cannot accept electronic payments. One payment is created for each invoice received.

Account Setup Payment Authorization Money Transfer Payment Creation

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EXHIBIT 6 (Continued)

Payment Tracking Reporting

The date each payment (electronic or check) is processed is tracked, including the dates the payments are created, sent, and cleared in the payment account. The VIP/VIPP system has reports that identify the payment accounts, monthly payment log by client by account, outstanding balances, etc.

Invoice Analyzer
Invoice 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 each finding. The rules used to analyze an invoice are maintained in a database. The rules are developed by the analysts 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). The main logic of the system is to apply each rule to an invoice. When invoice data are found to violate a rule, this is logged in the Findings table. It is possible for a single invoice data item (such as a specific call) to violate more than one rule. The violations identified and logged are summarized for the analyst. An analyst reviews the findings and 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 specific finding. For example, the review may have found 300 short calls and 25 long calls. All of the short calls can be classified as an opportunity at one time. Alternatively, each long call can be reviewed and only those that are questioned are marked as opportunities. The opportunities are reviewed with the client. The client authorizes which opportunities to pursue and which ones to ignore. Savings and Credits tables are updated with authorized opportunities. The Savings and Credits table is used to track implementation of the findings. MACs are generated for the authorized opportunities. Each MAC is for a specific service provider and can contain one or more opportunities. A Teletron analyst determines whether to combine opportunities or to submit them separately. The MAC system is used to track the progress of implementing an authorized opportunity. The Invoice Analyzer has reports that identify the findings, opportunities, authorized opportunities, etc.

Specify Rules

Review Invoices

Analyze Findings

Authorize Findings Savings & Credits Generate MACs

Reporting

Rate Optimizer
Rate 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 plans that 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 contracts negotiated between a service provider and a company. All Billing Plans must be published. The Billing Plans database can be maintained manually. This includes adding new plans, modifying existing plans, etc. Notes about specific plans, features, rates, etc. can be made by analysts. Most of the data in the Billing Plans database will come from a third party. The system will use this data to populate and maintain the data. It is able to distinguish data between the third party information and the data entered manually. 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.

Database Maintenance Database Population

Build Billing Plan Profile

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EXHIBIT 6 (Continued)

Build Client Profile Find Potential Plans Calculate Potential Savings Reporting

Rate Optimizer analyzes a clients telecom requirements and builds a profile that identifies the services required, the number of sites, components, and the mix of each. Rate Optimizer will match a client profile against the Billing Plan profiles and identify all Billing Plans that are candidates for supplying the services needed at lower cost. For each candidate Billing Plan, the potential savings are calculated. This is done by applying the clients profile against the qualifications of the potential plans and usage and calculating the cost of the candidate plan. 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 Management


Industry Information Management Maintain Aggregation Criteria Data Aggregation Cost Analysis The Industry Information Management system aggregates client telecommunication information into a database that views the information by industry rather than by client. The primary criterion for aggregation is the industry. There are additional criteria that can be specified to further refine the data such as annual revenue, number of employees, geographic region, etc. Each clients 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. Costs are analyzed by industry, service type, service provider, component type, time of year, etc., and any 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 is analyzed by industry, service type, service provider, component type, time of day, time of month, time of year, etc., and any combination. Service provider analysis includes analyzing what the actual average cost of a call is for a service provider 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 completing service orders, annual volume of billing errors, etc. 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. Virtual Analyzer will provide both standard industry reports and custom reports requested by service providers, industry analysts, and corporations who want to evaluate their performance against industry standards.

Usage Analysis Service Provider Analysis

Trend Analysis Industry Reports

Source: Company records.

Maybe later, replied Tim. Right now, Im more interested in exactly how you are planning to bring Virtual Analyzer to market. OK, replied Dennis. That is my area, at least for now. While we want the client to use all of the Virtual Analyzer modules as a single package, we will allow some customers to pick and choose among the various services. However, we believe that a customer must at least subscribe to the Client Information Management and Vendor Invoice Processing and Vendor Invoice Payment modules in order to realize any significant advantages from the Virtual Analyzer system.

Next, Dennis continued. We think that parts of the software are protectable . . we intend to file a patent application . when we finish the beta test in two years. Great, great . . . tell me how we are planning to price the product, asked Tim. You mentioned the customers will be able to pick and choose between the various services . . . how is that going to be figured into the pricing?Dennis explained,
Tim, pricing will be based on the size of the company and the number of modules they choose to use. Larger companies using only two modules would be charged about two percent

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of their monthly telecommunications cost while smaller companies using all the modules would be billed around six percent of their monthly telecommunications expense. So we expect our average customer revenue to be about $25,000 per month which is roughly four percent of their average monthly telecommunications bill.

Good, replied Tim. Tell me, how do we get to market? We have 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 a time. Clearly, we will have to do some of that, but it is very expensive. Alternatively, we can use our Web site to sell the software. That method is cheap and will work for some clients, but we think that most customers wont buy our solution by seeing a demonstration package on the Internet. They will want someone to visit them. Finally, we can create a series of channel partners. These are companies who sell complementary services, like help desk companies or information technology consulting companies. Some examples might be IBM, EDS, and some of the large accounting firms. We give them a piece of the revenue in exchange for their selling the product for us. Our guess is that we will have to use all three approaches.

This is one complex piece of software. I have worked on some big projects before and this one will be among the most complex ones I have seen. We have to imbed the thought processes our auditing analysts have been using for ten plus years into computer code. So the analysis time will be significant. We looked at going outside for the systems development work, but the cost right now is out of sight. And most of the consultants dont have any capacity anyway since they are all working on Y2K problems. So we are going to have to hire our own staff. In addition to designing and testing the software itself, there are lots of other costs that have to be considered as part of the investment. We need to buy lots of big servers. And we will need to translate all the data tables used by the providers in their contracts and invoices into a standard table that our system can use. This task by itself will be huge. We found out that AT&T alone has something like 800 different billing systemseach with a different data structure. Plus what we worked on alreadythe market researchcosts money. And the time we are going to spend contacting customers and providers must be considered as part of the investment as well. Our best estimate is that the project will take the rest of this year, all of next year, and be ready for alpha and beta testing by early 2001. We should not count on any revenue from Virtual Analyzer before 2002. Any revenue we get until then will come from operating our old business model.

OK. Well done, you guys. Give my thanks to the rest of your team, replied Tim. You have clearly thought about the issues from our customers standpoint. I like what I am hearing. But I cant invest money without a return, despite how good an idea we have here. Have you estimated how much this part of our transformation will cost us? Now comes the bad news, offered Bob.

Yeah, added Dennis. As this chart (Exhibit 7) shows, we expect the total investment needed to achieve this transformation will cost

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

Year 1999 2000 2001 2002 2003 2004 2005 2006

Revenue (in $000) $11,061 12,585 10,271 5,393 16,575 33,601 60,343 108,368

EBITDA (in $000) Investment (in $000) $971 1,801 1,124 (891) 5,540 15,612 27,947 49,598 $3,173 2,838 3,382 1,000 1,000 1,500 2,000 3,000

Source: Company records.

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us over $9 million spread out over 1999 through 2001. Plus, we have to count on added costs for enhancements of between $1 million and $3 million each year from then on. That is definitely the bad news. But . . . we think that we can definitely hit your revenue targets coming from this new business model. Getting to $100 million in revenue with nearly $50 million in EBITDA is really doable. After all, look at 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 would cost this much. So . . . you are telling me that to make this part of our transformation work, we have to spend over $9 million. That is quite a load for a $7 million company. We will have to raise that money . . . clearly Teletron wont generate that kind of cash internally.

Decision Time
Guys, said Tim. Again, let me thank you for your effort on this project. I need to consider whether I want to bet this companys future on this idea. And . . . I have to prepare a presentation for the board of directors that includes the return on investment from this endeavor for them to consider at its May 4 meeting in Bloomington. As the two task force leaders left his office, Tim Lybrook began to construct his presentation to the board. (See Exhibit 8.) He started by listing some of the benefits of the idea. Tim wondered what other benefits he was missing. He then started to make a list of risks. Tim stopped for now. He knew that there were additional risks he had not yet considered. He had to go to a meeting with the builder of his new building. But he knew that he had to finish the presentation. Of course, he first had to decide whether he really wanted to go ahead with the project.

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

Benefits A huge market with generally weak competitors. A steady revenue stream as an application service provider (ASP)remember the value of an annuity. Simple support process as an ASP with all software directly under Teletrons 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 entryrequires expertise and lots of capital. Risks Required reliance on the Internet, but we have no experience using this communications 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 markethave to use channel partners not under our control.

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