How does Cox Communications, a multibillion-dollar communications company serving more than six million residential customers and hundreds of thousands of commercial accounts, continue to thrive and grow in an increasingly complex market? The firm must accurately evaluate programming costs and leverage that information to build the most compelling and effective collections of cable services. This complicated task is now much easier thanks to the completion of Cox' two-year Cornerstone project to implement new Oracle E-Business Suite applications to replace the company's highly customized core business applications. Cox Communications Vice President and Chief Accounting Officer Bill Fitzsimmons is particularly pleased with how his company is utilizing Oracle Incentive Compensation, part of Oracle E-Business Suite, to reconcile subscribers per channel against content provider contracts. Managing programming profitability is critical because programming content is Cox' single largest expense. With the Oracle Incentive Compensation-based costs solution, the firm has a better understanding and control over what is owed to content providers and what channel listings are selling best, as well as a better understanding of its profitability for individual content providers. In addition, the solution provides faster reconciliation and auditable reports for its providers.

As Published In May 2006

Coming Into Focus
By David A. Kelly

Cox Communications profits by paying the right price for programming.

For most people, cable TV is a simple proposition: You turn on the TV, and there it is. But it's not that simple to Bill Fitzsimmons, vice president and chief accounting officer of Atlanta, Georgia-based Cox Communications, a multibillion-dollar company serving more than 6 million residential customers and hundreds of thousands of commercial accounts. "Delivering channels like CNN, HBO, and ESPN may seem easy to the consumer, but we have a complex programming model and a lot of moving parts to take into consideration to run the financial side of our business," says Fitzsimmons. "Our goal is to efficiently manage the increasing complexity and make proactive and profitable business decisions."

Snapshot Cox Communications www.cox.com Location: Atlanta, Georgia Revenue: US$6.4 billion in FY 2004 Oracle products and services: Oracle Database; Oracle E-Business Suite, including Incentive Compensation

Last year, Cox completed the two-year Cornerstone project, replacing its aging and customized core business applications with Oracle E-Business Suite applications. The vision was to use the financial applications to create a consistent source of information and enable business-driven reporting and planning that could lead to a dashboard view of the business—everything from back-end accounting numbers to service and subscriber details.

Managing programming profitability is an important component of that strategy, because programming content is Cox' single largest expense. A critical part of Cox' future success relies on how well it can evaluate programming costs and leverage that information to build the most-compelling collections of services. Cox needs to track how many customers are subscribing to different channels and reconcile that number each month against contracts with the providers in order to pay the appropriate amount and calculate product margins. Oracle and Cox partnered to solve a sophisticated industry challenge—reconciling subscribers per channel against content provider contracts. Such a solution is typically outside the norm of standard applications, but Cox was able to accomplish this using Oracle Incentive Compensation, part of Oracle E-Business Suite, in an unusual and creative way.

The result has been compelling, says Fitzsimmons. "With our Oracle Incentive Compensation-based programming costs solution, we have better understanding and control over what we owe our content providers, better understanding of what products [channel lineups and prices] are selling best, faster reconciliation, better understanding of our profitability for individual content providers, and auditable reports for our providers to verify against if they need to."

The Programming Challenge

Each year, Cox renews a portion of its contracts with content providers—such as Disney or CNN—and agrees to pay them based on specific contract terms, including key metrics, such as the number of subscribers to provider channels. Program suppliers need to know how many people have signed up for (and are receiving) their programs. To do this, Cox creates a summary each month showing how many customers subscribed to which products, and then calculates a payment based on the contract terms for that service provider.

It isn't easy to count the subscribers to a cable channel. Cox has hundreds of different "headends," or actual video transmission units that send video signals out to its cable subscribers. Each of those headends will have one or more channel lineups, each with a potentially different mix of programs—so tracking which customers paid how much for what programs becomes very complex. And the algorithm becomes even more complicated when you add subscriber changes and other considerations. For example, decisions have to be made (or are stipulated in the contracts) about how to estimate or count subscribers for commercial accounts—such as restaurants and motels—as well as for subscribers that add or drop the service at different points in the month.

"We want to end up with the calculation of the fee that goes into our Oracle accounts payable system and generates checks to the vendor," says Fitzsimmons. "When it's done right, we have management information that we can use to understand the breakdown between what the cost is for a particular channel lineup in a given system and what the revenue is, so that we can understand our margins and have a good business sense of how much the product is costing us versus how much we are collecting for it."

Previously, the program cost application was a custom component running on an IBM AS/400 system. "It was a very complex process to manage, and it was one where we had a very old, homegrown system that made payments," says Fitzsimmons. "But what we were really lacking was the ability to extract precise data so we could better analyze our costs versus the revenue we were receiving in these video packages. We also needed the ability to understand the profitability of different packages of services that combine video, telephone, and high-speed data products so that we could manage the margin on each one."

Knowledge Is Power The traditional cable company, and indeed the industry, is undergoing rapid change. For additional perspective on how change is affecting companies, Profit spoke with Yankee Group's Paul Hughes, vice president of communications operations strategies. "Virtually every communications market is facing the same issues, but one of the predominant issues that multisystem operators like Cox Communications are facing is the competitive challenge coming from the satellite providers and the need to move into a broader portfolio of services, such as adding voice, data, and perhaps even wireless to traditional video services," says Hughes. "As a result, one of their biggest needs is around customer retention and really understanding what the customers are looking for and what they're responding to." This becomes even more critical as companies consider unbundling video services for à la carte cable (perhaps even customizing channel lineups or video products by customer) as they bundle in new service offerings such as phone and wireless. All these options generate reams of back-end customer, product, and financial data. "There's a big push for customer centricity and a lot of investment in business intelligence capabilities that can really give you ability to take advantage of information that's coming in off the network," says Hughes. "Being able to do that gives the carriers a much better opportunity to really understand what the customers are looking for, as well as being able to make the business more efficient. The more information a carrier has on what customers are actually subscribing to specific channels, the better position the company is in to actually save money and increase their profits." "There's a big focus on customer profitability and the ability to be proactive with customers rather than reactive," says Hughes. "For example, if you have a product bundle that you're seeing limited usage or uptake of, you may need to reevaluate it or repackage it to make it more compelling. The more visibility you have, the more proactive you can be with your customers and against competition—making you more operationally efficient. In this case, knowledge is power."

The Right Solution

The monthly reconciliation process consists of getting the gross subscriber numbers from the billing system, doing some data manipulation and transformation, and then calculating the payments owed to the content providers based on specific provisions in their contracts. On a monthly basis, Oracle Incentive Compensation pulls the channel lineups and customers from the billing system and aggregates the information. For every franchise that Cox has (roughly 1,500, because a franchise can be anything from a whole city to a single neighborhood), the system receives the subscriber counts by channel—something that results in hundreds of thousands of data points. It takes that data and crunches it down to determine how much Cox owes each contracted content provider.

Although payments for programming content may seem quite different from sales commissions that Oracle Incentive Compensation typically manages, they're actually remarkably similar. "We're basically doing royalty types of payments in Oracle Incentive Compensation, but it's the same principal as commissions," says Mark McGuire, executive director of enterprise applications at Cox. "It's straightforward from that perspective, and the reality is that the algorithms and contract terms are similar—if we reach these types of volumes, we have to pay the content providers a predetermined amount of money."

Cox continues to implement refinements to the process. "This is a core component to our business, and it needs to be fed and watered each month—but it's not the applications but our process that's still evolving. We're reevaluating it each month to continue to streamline it and make it more efficient for Cox," says McGuire. "One nice thing that Oracle Incentive Compensation does is it allows us to go back and do prior period adjustments if we realize there have been errors, something we couldn't easily do with our previous solution."

The Business Benefits

Maximizing data quality is particularly important for Cox' program cost accounting process, because its largest business expense is directly affected. "Mistakes with this data can ripple through the whole organization," says McGuire. "This implementation really helps align the activity with the responsibility, and as a result our data quality has gone way up."

The system has also helped executives plan their budgets more effectively. With all expense data in a single place, budget reports and forecasts are more detailed and accurate, delivering actual subscriber costs at the site level. This view of the data makes it easier to plan for cost increases and maximize the profitability of certain channel lineups. "Before, our users only thought of this process as a way to pay our bills," say Fitzsimmons. "But now, thanks to Oracle, it's becoming a tool to help us plan our profitability."

Additionally, the program cost accounting process runs much faster—down to a few days instead of the whole month—increasing performance and delivering timely business results. A by-product of that faster monthly close has been greater IT efficiency. "We're using the same infrastructure as our core financials and supply chain applications," says McGuire. "I can rely on the same team to support them as opposed to having another platform, and it makes it easy to diagnosis performance issues or do application upgrades or patches."

Pricing and Packaging Success

Understanding the existing product mix and margins is critical for profitability in any business, but it's even more important in a fast-moving industry such as cable. Not only are cable companies delivering more services, but they may also need to fundamentally alter the delivery of their core product—cable TV channel packages —with the potential adoption of à la carte cable programming.

"Ten years ago, our business was cable. But over the past ten years, we've not only changed our name from Cox Cable to Cox Communications but we offer a variety of other services—video on demand, high-speed data, telephony service—and we're even moving into the wireless market through a partnership with Sprint," says Fitzsimmons. "If you do some of the permutations and combinations that you learned in high school, you'll see the array of product packages we can offer customers is pretty overwhelming."

For More Information Oracle Incentive Compensation Oracle Solutions for the Communications Industry

À la carte cable programming, or the ability for consumers to select individual cable channels and build their own channel lineup, presents another challenge to video providers if adopted on a widespread basis. It would have the potential to dramatically alter program cost accounting and business planning.

As a result, tracking interest in specific packages of video, phone, and high-speed data, and understanding the profitability of each package, is important to Cox. "If we find that certain packages of video, voice, and data products have the right margin mix and are appealing to customers, we're going to promote them so that more customers select Cox as a one-stop shop for their TV, high-speed data, and telephone," says Fitzsimmons. "Our Oracle Incentive Compensation-based program cost accounting system is going to help us address this challenge."

A key goal is to give customers choices while not overwhelming them and to make sure an increasingly diverse set of products is priced competitively. "With all these service and packaging opportunities, we have to get more sophisticated in how we analyze information to make sure we're giving the consumer a good deal, but at the same time we're not hurting ourselves," says Fitzsimmons. "That will be a key benefit of the Oracle Incentive Compensation implementation."