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, supports growth in bandwidth requirements and network expansion, allows the customer to add services or to migrate to new services at nominal costs, obligates the carrier to address/resolve instances of subpar service, and provides a workable process for resolving disputes, particularly billing disputes.
The Agreement Should Have a “Flat Pricing Structure.” There are two elements to a “flat pricing structure.” The first is fixed rates for the term, as opposed to percentage discounts of standard rates. The latter are typically set out in the carriers’ on line pricing schedules or guides that carriers can change from time to time at their discretion. The second is what we call “consistent pricing” in which the net rates are in effect beginning the 1st month and extending throughout the term. By contrast, the carriers opt to issue credits (“performance credits,” “incentive credits,” etc.), effectively deferring the projected net rates or “savings” until late in the term of an agreement.
This use of these credits complicates pricing reviews and forces customers to rev-up the procurement process to establish “a credible threat of loss” to obtain/maintain competitive rates. Deferred credits also obligate customers to pay higher monthly taxes, regulatory surcharges, and carrier administrative charges all of which are based on the billed rate for the services provided. Collectively, these assessments can approximate 10% to 20% of monthly charges. Deferred credits require the customer to “carry” the inflated assessments for non-discounted rates until the credit is issued months later.
Pricing Reviews. The markets for wireline services and associated managed services are reasonably dynamic. While only carriers offer transport services, multiple entities offer managed services. Changes in market pricing occur episodically. Customers want to capture these downward changes at reasonable intervals, typically on an annual basis. This is the purpose of pricing review clauses.
The challenge in negotiating these provisions is, as Rick Sigel noted during our briefings this past spring, that these provisions must have “some teeth,” and not a mere promise from the carrier to meet and talk. For example, if the enterprise or its consultant reasonably establishes that prices have moved downwards, typically beyond some nominal amount, and the service provider declines to make an appropriate adjustment, there should be a consequence. The commitment level should be reduced or the term of agreement abbreviated.
Minimum Commitments. A focal point of almost every negotiation is the customer’s minimum expenditure commitment, which reflects an agreed upon percentage of projected cumulative expenditures. The minimum commitment imposes a “take or pay” obligation on the customers. Carriers often push to add incentive credits (an expenditure threshold must be exceeded to earn the credit) and service-specific commitments. The latter are intended to increase the cost of migrating portable services, such as high speed Internet access services, to another carrier. In lieu of a service-specific commitment, the carrier may impose a term-length minimum service retention period.
On occasion, no-commitment, volume pricing tiers is offered. While the carriers largely dismiss this idea, zero commitment agreements should be more prevalent, particularly for deals having substantial MPLS expenditures. The value of MPLS’ “any-to-any connectivity” and the resources required in establishing these enterprise-wide networks negates the likelihood of customer migrations, absent serious service issues.
While many consultants prefer “term” commitments over “annual” commitments, the author puts greater weight on the commitment level (percentage of projected spend) as opposed to whether it is a term or annual commitment. A relatively modest minimum commitment provides customers with a measure of flexibility to migrate traffic to other carriers, providing a de facto “self-help” remedy if substantial service, pricing or support issues arise. Consultants prefer the term commitment, according to Dick Sigel, because it often allows the customer to renegotiate rates earlier during a three-year deal.
Customers typically seek a “business downturn” clause which is intended to provide the customer an opportunity to negotiate relief from the shortfall payment obligations for not satisfying its minimum commitment due to substantial business downturns, major sales or divestitures. Workouts include extensions of the contract term or increased rates to meet or approximate the revenue shortfall.
Another longstanding provision is a technology migration clause. This provision is intended to minimize the impacts (minimum commitment shortfalls, typically) of migrating to a different service/technology to meet existing requirements at a lower price or to meet requirements that are not met in an optimal fashion by the incumbent’s portfolio of services. This provision addresses two different scenarios. The first is when another carrier offers a new, innovative service not offered by the incumbent. The second arises when the customer elects to migrate from one technology to another, such as shifting from MPLS to an Internet-based VPN arrangement. In both cases, the incumbent carrier is looking at a reduction in revenues. Accordingly, carriers typically offer a promise to talk in these circumstances.