In international voice telecommunications, least cost routing (LCR) is the process that provides customers with cheap telephone calls. Within a telecoms carrier, an LCR team will be choosing routes from between twenty to over one hundred suppliers for five hundred or more destinations across the world on a weekly or even daily basis to maintain a competitive cost base and acceptable call quality.

A telecoms carrier will buy and sell call termination with other carriers. A carrier such as Telewest or France Telecom will be interconnected with other telecoms carriers and so will have a number of routes of different price, quality and capacity to a given country. In the de-regulated EU, these will be licensed alternative operators (e.g. Cable and Wireless / Energis in the UK or Jazztel in Spain) or the ( PTT)’s of other countries, such as T-Systems (Germany), Telefonica (Spain), NTT (Japan) or Telstra (Australia), who establish offices or a point of presence (POP) in a major telecommunications hub city such as London, New York, Hong Kong or Amsterdam. The major US carriers, Sprint, Verizon, AT&T and Global Crossing in the US also have POPs in these hub cities. There are also niche carriers which specialise in providing termination to a small number of destinations, sometimes through the use of grey routes.

The carrier-carrier market is not trading in the same sense that stockbroking houses trade with each other. Whereas brokers and banks may buy and sell the same stocks or bonds with each other in the same day, carriers have to be very careful not to do that. If carrier A buys Venezuela from carrier B who buys it from A, one call will come in to carrier A, go to B and go back to A again, over and over until all the circuits are taken up with one call. If it does terminate on an overflow route, the carriers may bill each other many times over for the same call. This is called looping and is very undesirable.

The LCR team in a carrier follow a cycle: the buyers negotiate with their suppliers and get a new price schedule; the prices are loaded into the software to calculate and compare termination costs; a route is chosen, fixing a cost-for-pricing; and new prices are issued based on the costs-for-pricing. The new routes are implemented on the switch and finally the traffic volumes and margins are monitored through reports from the billing system. Loss-making traffic and odd routings are investigated, and either the billing system has its data corrected or routing and pricing action gets taken.

Carriers sign interconnect agreements with each other specifying the terms under which they will do business. As well as the usual terms of payment and dispute resolution, these will include the terms of price notifications. The industry standard is currently seven days for price increases while price decreases take effect on the day of notification. Because the margins in the carrier-carrier market are around 5% – 10%, re-routes or price increases must be made quickly to a destination where the current route is going to increase in price. Since the price increase itself has seven days’ notice, it must be issued within twenty-four hours of the cost increase to avoid losses. This puts a significant pressure on the carrier’s LCR team, who must process the offers from their suppliers quickly and accurately.