The 2nd entry explained the sources of customer leverage. This and the remaining entries offer insights into exercising this leverage to achieve balanced, sustainable agreements. This entry focuses on the major pricing considerations in wireline services agreements.
Sustainable Agreements. From the customer’s perspective, a sustainable agreement provides market pricing throughout the term,
Telecommunications services procurements are predictable recurring events. The standard terms for wireline and wireless agreements are three and two years, respectively, often with one or two 1-year renewal terms. Enterprises may either engage in the process proactively or let the carriers’ dictate the rules of the game. From any number of perspectives, proactive engagement is far preferable.
This is the second entry in a series on procuring telecommunications services. This entry focuses on the sources of customer leverage in negotiations with services providers.
The content is tilted toward wireline procurements, but the major distinctions of wireless procurements are highlighted at the end.
Establishing the Opportunity or the Threat of Loss
This past spring Rick Sigel of Silver Lining Telecom and I conducted several briefings on best practices in telecommunications services procurements. Rick noted that enterprise customers possess two sources of leverage: (1) the ability to direct new business to a services provider or, for the incumbent carrier(s), establishing a credible threat of loss of business; and (2) conducting an organized, even-handed procurement. The latter establishes the credible threat of loss.
The first leverage point is intuitive, but often overlooked. Carrier account teams want new business from customers—organic growth from an existing customer, more data services, or replacing the incumbent carrier’s services. If there is little change in current business and no threat of loss, contract renewal negotiations with the incumbent can drag-on interminably. By contrast, if substantial new business is at hand, carrier account teams engage their product managers, offer managers and in-house counsel to get the deal done.
In order to make the internal business case, the hard and soft costs associated with a procurement should be quantified. Hard costs include costs of services from both incumbent and successor carriers during some part of the transition process, new CPE or CPE modifications, and costs of consultants and outside counsel. Soft costs include internal resources required to undertake the procurement and support the transition.
Be Prepared and Committed to the Procurement Process
Timing. The process must be initiated well prior to expiration of the customer’s existing contract to elicit serious responses. Carriers know that customers (1) require substantial time and must devote limited internal resources to migrate services to successor carriers, and (2) want to avoid/minimize the sharp increase in pricing that occurs at contract expiration as the incumbent carrier’s rack rates come into effect. Potential successor carriers will not participate or tender pro forma responses, if the RFP is constructed haphazardly or issued too close to current contract expiration.
Accurate Demand Sets and Thorough RFPs. There is nothing virtual about demand sets and RFPs. Services providers need to know customer locations, usage profiles/details for voice and wireless, number of users, bandwidth requirements (port sizes)—existing and proposed—to assess the opportunity, develop cost models, formulate proposed pricing and otherwise complete the responses to the RFPs. The RFP should be structured to elicit a thorough and helpful response, and accommodate “apples to apples” comparisons of all bidders’ responses.
Qualified Bidders. Rick Sigel also noted that a customer should qualify the bidders to whom it wishes to issue an RFP. Past experience, the carrier’s footprint, service offerings, and, its financial position are among the factors to consider in developing a bidder’s list. Technology Companies may have more potentially qualified bidders because they typically do not maintain as many locations as other enterprise customers and their priority service tends to be high speed dedicated Internet access which is offered by almost all Tier 1 to Tier 3 carriers. A related consideration is whether to structure the procurement to award business to a primary and secondary carrier.
Knowledgeable Consultants. Most companies, except for some of the very largest enterprises, benefit by retaining experienced procurement consultants. Few enterprises have staff experienced in developing demand sets and structuring RFPs relevant to telecommunications procurements. Even if inclined to employ these individuals, enterprise staff are not regularly involved in procurements and challenged in determining current pricing trends and carrier strategies.
Current competitive pricing is not publicly available, except for some government contracts. While subject to strict confidentiality obligations, consultants are in a position to advise whether a customer’s current rates or carriers’ proposed rates are “at or near current market rates.” Continue Reading Wireline and Wireless Procurements–Sources of Leverage
This is the first in a series of entries on wireline and wireless procurements, from the perspective and for the benefit of today’s enterprise customers. This entry highlights the distinctions between wireless and wireline procurements. In subsequent entries, we identify the sources of customer leverage and explain the merits of negotiating the best possible agreements; review priority business and legal terms and conditions, including positioning the customer for its next procurement; and, conclude with an entry on customer-oriented remedies.
Introduction. The customer base and demand sets for enterprise wireline services are undergoing a major transition. E-commerce site operators, social networks and cloud computing entities (“Technology Companies”) have joined the Fortune 1000, state governments and the Federal government as major enterprise services customers. Technology Companies tend to have noticeably fewer sites, but far higher bandwidth requirements. High speed Internet access service, not circuit-switched voice, is the ubiquitous wireline service. MPLS has displaced frame relay. Customers are demanding increased bandwidth for all data services.
Commercial wireless service providers offer “one-size fits all” voice and data services for residential and business customers. The latest smart phones and tablets are offered to residential and business customers without distinction. On the other hand, non-standard pricing plans and device refresh cycles are offered to business customers. The continued growth of wireless services, particularly the continuing demand for ever higher data rates, suggests undifferentiated services currently meet customer requirements. The exception is M2M services. These offerings are geared to business customers. M2M traffic can be routed to customer’s data services, as opposed to the public Internet—a selling point for many businesses.
Wireline and wireless services providers are similar in one major respect: carriers’ facilities-based services footprints can and do vary widely. Many companies obtain service from at least one other wireless and wireline carrier, respectively, in addition to their primary carriers.
The major carriers—AT&T and Verizon—market, provision and support wireline and wireless services through distinct organizations. These providers do not bundle wireline and wireless offerings and have different contract templates for these respective offerings. Sprint largely follows this practice. The standard term for wireless agreements is two years, three years for wireline agreements.
Wireline Service Procurements. Wireline carriers offer an expansive menu of data rates for high speed Internet access services, MPLS and VPLS offerings, high capacity private line Ethernet and TDM services, and multiple voice options (IP and circuit switched). Wireline carriers consider and often respond to requests for special construction. Wireline service account teams aggressively market managed services, such as network management, data center/colocation, firewall, and conferencing services, as well as voice and data transport services. An experienced consultant recently noted “[c]arriers are aggressively pursuing managed services business because margins are higher than traditional transport services and because the carriers are eager to move up the value chain and provide services that penetrate further into their customers’ premises.”
Wireline carriers offer domestic, international and rest-of-world services. Many multinational enterprises often look to a primary MPLS carrier to connect the entities’ principal locations throughout the developed and developing regions of the world. Despite the substantial bundling of services, very little, if any, wireline CPE intended for enterprise customers is subsidized by wireline carriers and [mandatory] bundling of CPE with wireline services—enterprise or not—is rare.
Enterprise agreements typically include SLAs with multiple metrics for MPLS, VPLS, and private line offerings and a more limited set of SLAs for high speed Internet access services. These metrics include site-specific availability and mean-time-to-repair, and latency. Wireline SLAs vary by services provider and region (US and Canada, Mexico, EMEA, South America, and Asia PAC).Continue Reading Wireline and Wireless Services Procurements: An Introduction
Rather than emulate the public cloud computing business models of Amazon or Google, IBM and AT&T have elected to bring their respective strengths together in an enterprise-focused cloud computer offering targeting Fortune 1000 customers, allocating responsibility for cloud infrastructure and computing to IBM and networking/transport to AT&T.
The companies’ are highlighting the enhanced security functions
The FCC’s Further Notice of Proposed Rulemaking proposes significant, substantive reforms to the manner in which Universal Service Fund (“USF”) contributions are assessed.
The FNPRM undoubtedly will elicit a blizzard of comments and counterproposals as interested parties assess and respond to the proposed changes. At this juncture, several comments are warranted:
This is the third of three entries analyzing telecommunications services agreements. The first—Overview—highlighted the structure and basic components of telecommunications services agreements. The second—Revenue Assurance—focused on the carriers’ interest and mechanisms for locking-in projected revenues. This third entry—Risk Mitigation—looks at damage caps, termination rights and indemnity obligations in carriers’
This is the second of three entries analyzing telecommunications services agreements. The first entry—Overview—highlighted the structure and basic components of telecommunications services agreements. This entry—Revenue Assurance—focuses on the carriers’ interest and mechanisms for locking-in projected revenues. The third entry—Risk Mitigation—will take a closer look at the carriers’ views on damages, termination rights and customer indemnities.
Revenue Assurance
Fundamentally, standard Wireless and Wireline services agreements are drafted to ensure that customers spend the minimum amounts that they committed to spend. After agreement on services and rates, negotiations inevitably shift to minimum revenue commitments. Notions that the quality of services delivered or the support provided should impact this revenue stream are clearly lacking in carrier agreements and negotiating strategies. It often seems that carriers are far more focused on revenue assurance, perhaps for internal revenue projections ultimately shared with stock analysts, than revenue growth.
Volume-Based Pricing—Yes and No. Broadly speaking, pricing for Wireless and Wireline services are volume-based. A study conducted by a leading consultant several years ago of publicly available data confirmed this point, but also disclosed substantial variability in rates for similar commitment levels. Another theory, largely rejected by experienced customers and consultants, is that the larger the percentage commitment for a customer’s projected spend level, the more aggressive the pricing.
Taxes, Surcharges and All Other Costs the Carriers Can Imagine. Wireline and Wireless services are subject to an endless stream of taxes and surcharges imposed by the FCC, state agencies and state governments. The largest surcharge is the Federal Universal Service Charge which the carriers have been permitted by the FCC to recover from their customers. The current FUSF charge is 17.9% for interstate Wireline services; the so-called “safe harbor” percentages for Wireless service are noticeably less.
Unlike taxes imposed incident to the sale of goods to consumers, principally sales taxes, the carriers’ standard practice is to recover all surcharges and taxes imposed on them by state and local governments, from property taxes to gross receipts taxes, excluding only taxes on earned income. These costs are typically recovered through one or more separate line items on customers’ bills. The carriers also recover a range of costs incurred in the operation of their businesses, such as regulatory compliance costs.
Thus, while rates may nominally be “fixed” under many services agreements, the recovery of taxes, surcharges and other variable costs is now approximating 20% of the net charges for Wireline services and because of the endless stream of state taxes, growing at a healthy clip for Wireless services. The rising levels and litany of taxes and surcharges drive customers to renegotiate rates and re-procure services. They must do so to minimize substantial increases in expenditures for telecommunications services.Continue Reading Ins and Outs of Telecommunications Services Agreements: Part 2–Revenue Assurance
This is the first of three entries analyzing telecommunications services agreements. This entry—Overview—highlights the structure and basic components of telecommunications services agreements. The second entry—Revenue Assurance—will focus on the carriers’ interest of locking-in projected revenues. The third entry—Risk Mitigation—will take a closer look at the carriers’views on damages, termination rights and customer indemnities.
Overview
Wireline and Wireless services agreements include general terms and conditions, typically set out in a “Master Agreement.” Negotiated service-specific rates or, for Wireless services, plans and pooling arrangements are set out in attachments or schedules. Wireless and Wireline services are generally procured separately, having separate agreements, although one carrier opts for a single master agreement covering both service categories. The benefits of consolidation are limited, in our view, if the customer’s total spend does not result in improved overall pricing or other tangible benefits.
Wireline Agreements. Customers and carriers typically negotiate an overall minimum revenue commitment that may be an annual or term commitment. Customer expenditures for most services typically “contribute” to satisfying the minimum commitment with the possible exception of local exchange services which, in many cases, are still subject to tariffs. Tariffs take precedence over contracts. Whether local services “contribute” to the overall commitment is a point of negotiation. A more recent twist is the offer of a major credit based on an actual expenditures over a given period, typically a year.
In addition to domestic services, Wireline agreements may include international and “rest of world” services. The latter denotes services that do not originate or terminate in the United States. International services originate or terminate in the United States. The services in these agreements include dedicated internet access services, voice and data services, such as MPLS, high capacity access services and managed services—carrier monitoring of customer premises equipment—typically routers and sometimes PBXs—enabling more rapid identification of service/equipment troubles and resolution Firewall and other security services are offered, as well.
Wireless Agreements. Wireless agreements tend to be domestic-focused with options for business customers whose employees travel internationally. Various volume-based incentives and disincentives are common in these agreements. The carriers continue to push for “preferred provider” status.
Minimum line commitments exist to recover the cost of discounted handsets. As a practical matter, each carrier offers its own portfolio of handsets, tablets and wireless cards, in part, to ensure these devices have “backward compatibility” over its respective spectrum bands. Thus, carrier assertions that customers must look exclusively to handset manufacturers in connection with equipment issues strain credibility. The devices generally are not portable to other carriers’ networks. Adverse customer impacts of IP litigation among handset technology owners is an emerging issue.
Another feature of Wireless deals is the availability of corporate liable and individual liable service arrangements. Under the latter, individual employees enter into individual agreements with the carriers, assuming responsibility for paying for their own services and handsets, but at the discounted rates negotiated in the enterprise’s agreement with the carrier. Individually liable arrangements are part of the growing IT management challenges triggered by employees using their own remote devices to access corporate networks and data resources, often referred to as the Bring Your Own Device (“BYOD”) trend. Continue Reading Ins and Outs of Telecommunications Services Agreements: Part 1-Overview
If you want any dispute arising from a services contract to be quickly resolved, you probably need to include a mandatory arbitration clause in the contract. Why? Because the delays in resolving civil cases in court continue to grow. This situation further supports our standard recommendation that enterprise customers should seriously consider seeking to resolve
Beware of the Tipping Point. Telecommunications services procurements do not always yield the targeted results. This typically arises when a non-incumbent carrier concludes the incumbent is going to retain the business. This can and does occur when the customer signals—intentionally or not—that the RFP process is just a formality.
It can also arise in connection