The methodology behind the Efficiency Index
Can one figure really say it all?
For a long time, I would have answered no – and defend my view with that it would be over-simplistic given the business complexity and multitude of inputs. I had to realise, though, that people still compare EBITDA margins between operators, believing that it is a sufficient indication of efficiency.
The EBITDA margin is affected by factors that have nothing to do with efficiency: country GDP, number of competitors, country ICT development, country payment standards, access to electricity in rural areas etc. It is also affected by factors only partially related to efficiency: market share distribution, prepaid/postpaid preference, demand profile, penetration of electronics goods, growth rates etc. And, of course, strategy – your own and competitors' – and how well you have implemented it.
But what if we could rule out those factors that aren't affecting the efficiency of telecom operators? And adjust for those factors that are the explanatory factors for efficiency? Maybe then it could work out? The need is clearly there.
So through thorough data research – collecting, analysing and correlating data from more than 400 local operators globally – combining it with data from telecom regulators, governments and international institutions like IMF, ITU and UN, we managed, with expertise and experience, to build an index that really adjusts for the factors that explains efficiency within telecoms.
The result is the Efficiency Index – capable of reliably comparing the efficiency between telecom operators. In this page, you will get further insight into the methodology behind.
I hope you find it interesting!
Fredrik Jungermann, Founder of tefficient and inventor of the Efficiency Index
Data flow and calculation
The Efficiency Index is in 2013/2014 based on twelve sub-indices – selected because they are the most decisive (based on real data) when it comes to efficiency within telecom operators.
In the first step, each sub-index is calculated based on operator data – both publicly reported and non-public data provided directly. Reported data from local competitors or from the local regulator are also used in some of the sub-indeces. The calculated value is compared to a preset, non-linear, min-typical-max range based on the actual distribution within the global operator industry. If your value is typical, the sub-index value will be 100.
In the second step, each sub-index is adjusted against one, two or max three unique explanatory factors. The point here is to compensate a sub-index value that is high or low because of certain factors (and not because of efficiency).
Let's take an example: A low subscriber retention cost (SRC) is generally seen as an indication of efficiency. But if a low SRC is because the contract binding period to operator A is shorter than that of operator B, it is not enough to look at the SRC per retained customer. Instead, one has to compensate for the binding period. Similarly, a SRC can be high, but if it results in a low customer churn, it might actually be more efficient.
All adjustment factors have been selected based on data research and -correlation. Also the factors feature preset, non-linear, min-typical-max ranges. After the adjustment, a typical sub-index value is still 100.
In the third step, each of these adjusted sub-indices is assigned a certain, preset, relative weight (based on real data).
Summing these together gives the Efficiency Index value.
A typical operator will – based on the input data used for calibration – get an index of 100. All min-typical-max ranges have been preset, based on all available data, to make sure that a certain operator's index will not be affected by operators added to the Index at a later point in time. The "100" position will not be affected either.
The min and max values in the final output graph (left) should be seen as theoretical and unachievable, since it is in practice impossible to have conflicting sub-indices all being at minimum or maximum at the same time.
The output graph always shows a date in case model adjustments are made at a later point in time.
What is an indicative Efficiency Index?
For various reasons, not all operators would actively contribute to getting its Efficiency Index calculated. It can be assumed that operators striving for efficiency and operators already being more efficient than typical have higher propensity to actively contribute.
In order to provide participating operators, investors and analysts with a possibility to understand approximately where non-participating operators are, indicative Efficiency Indices will be calculated for those operators that report a 80% sufficient set of data (or where local regulators report the missing part). Whether an Efficiency Index value is verified or indicative will be clearly shown not to mislead anyone.
What about next year?
The Efficiency Index is an annual index. The design will be reviewed next year – including the sub-indices chosen, the min-typical-max value ranges and the weighting – based on fiscal year 2013 operator and regulator data – and latest data from international institutions. This means that what was good enough for 100 in 2013/2014, might not be good enough for 100 in 2014/2015. The typical operator will still get an index of 100, but the 100 position will develop with the industry.
The Efficiency Index calculation should consequently be done minimum once a year to provide an up to date picture of reality. It can be done more often as well, e.g. for the last 12 months at any point in time.