Customers & Industries: MegaFon

Palisade’s DecisionTools Suite Underpins Enterprise Risk Management Programme at Russian Telecoms Giant, MegaFon

  • Industry: Telecom
  • Product(s): DecisionTools Suite
  • Application: Enterprise Risk Management

Summary

Russian mobile network operator, MegaFon, uses several tools from Palisade’s DecisionTools Suite to integrate risk management within its budgeting and investment planning processes. This decision support software provides MegaFon`s management team with transparency and understanding about the risks involved in planning, and therefore facilitates decision-making without guesswork. This enables the company to maximise capital expenditure efficiency.

DecisionTools Suite

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Palisade’s decision support software is a well-balanced and flexible instrument that can be applied to a wide variety of situations, making it ideally suited to managing risk across the enterprise. The technology is reinforced by Palisade’s proactive approach to business: it provides support including articles, books and events, such as its informative and example-led conference programme. Overall the company ensures that customers get the most out of these versatile tools.
Dmitry Shevchenko, Head of Risk Management, MegaFon

Background

MegaFon is one of the three largest mobile telecommunications operators in Russia, and has subsidiaries in Tajikistan, Abkhazia and South Ossetia. It is the only company with its own mobile network and has over 63 million active subscribers.

The company has built a reputation as a technical innovator, being the first Russian telecoms operator to launch GSM and 3G, as well as successfully test 4G. It operates a conservative financial management strategy, which enables it to maintain and strengthen its market position and embrace new opportunities when they arise.

MegaFon has always undertaken risk management on an informal basis. In 2012 it increased and formalised its level of qualitative analysis and forecasting, as well as put in place a process that would integrate risk management with its budgeting and investment planning. The aim was to provide the management team with insights that enabled informed decision-making to increase its capital expenditure efficiency.

@RISK Enhances Budgeting Process

Every year, MegaFon’s eight regional branches in Russia are required to undertake a major planning and accounting exercise for the 12 months ahead. This provides the management team with an in-depth analysis of the risks associated with each element of its budget and enables it to determine whether the company will be able to fulfil its promises with regard to costs incurred and revenues achieved.

Each branch states the risks it faces, such as competition, changes in legislation that will require it to operate differently, price increases and changes to staffing costs. They also calculate how much each budget will be over or under the forecast.

The risk management team at MegaFon’s headquarters amalgamates the information from each of its offices and simulates possible scenarios using an @RISK model. The variables within these models are analysed in a tornado graph, allowing the five critical factors most likely to significantly affect the company’s gross revenue to be identified and therefore mitigated.

In addition, @RISK shows realistic minimum, best case and median budget figures and the probability of their occurrence. These are compared to the budget plans to determine whether the forecast is too aggressive or not ambitious enough. Overall, the management team can see whether their desired revenue is achievable.

Informed Investment Planning with @RISK and TopRank

Each year MegaFon needs to plan for the continuous upgrading of its network. Projects include building new antenna, installing the latest equipment and laying fibre optic cable.

In 2012, MegaFon took the decision to invest in a large construction project with the aim of minimising its operating costs and improving network quality and control over technical operations.

Two potential locations were shortlisted and the management team used Palisade’s software to make an informed decision on the optimal one. It first used Palisade’s TopRank to perform sensitivity analysis to identify the factors in each location that would have the most influence over the total cost of the project.

From here, the team used @RISK to forecast how these critical factors might change. This allowed MegaFon to understand the most likely Net Present Values (NPVs) for each possible location and identify the risks for building or not building (i.e. opportunity cost) each data centre.

@RISK allowed MegaFon to use graphs to show easily how NPV and cash flows could change over time, and the probabilities of those changes occurring, rather than the static number that they would have had to rely on without the risk analysis tool.

Reducing Financing Risks

Future plans for MegaFon’s risk management programme include developing it to enable the company to analyse various risks through modelling. For example, as part of an exchange rate risk mitigation plan, MegaFon plans to analyse the different derivatives they can purchase by simulating different scenarios and exchange rates to provide a clearer picture of potential losses and gains.

Versatile Software Tools Underpin Risk Management

“Palisade’s decision support software is a well-balanced and flexible instrument that can be applied to a wide variety of situations, making it ideally suited to managing risk across the enterprise,” explains Dmitry Shevchenko, head of risk management at MegaFon. “The technology is reinforced by Palisade’s proactive approach to business: it provides support including articles, books and events, such as its informative and example-led conference programme. Overall the company ensures that customers get the most out of these versatile tools.”

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