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This entry provides an overview of how enterprise customers shape the underlying business deals in telecommunications services agreements. In the previous entry, we discussed the primary objectives enterprise customers look to achieve in negotiating telecommunications services agreements.  In our initial entry in this series, we discussed the challenge counsel for enterprise customers face in confining telecommunications services agreements to the four corners of the customer contract.

Overview. There are two basic approaches for putting these deals together. The first is the default or “seat of the pants” approach in which the customer (telecom manager) limits discussions to the current provider(s), typically 3 to 6 months prior to expiration of the current contract and, based on informal discussions with consultants or other customers, asks for a “market-based” reduction in rates for a new three-year deal, maybe remembering to request pricing for replacement IP services. The second is to initiate a more structured process 9 to 14 months prior to the expiration of the current agreement by engaging an experienced consultant to develop a demand set for an RFP to issue to both incumbent and potential successor carriers and to advise on trends in carrier services and pricing, particularly the transition to IP-based services offerings. This entry focuses on the second approach.

Caveat: The incumbent often prevails even under a systematic, well-planned procurement. Transitioning to successor providers is resource-intensive and, for some period, entails the payment of services to the incumbent and the successor provider during the transition process. Hot cuts are not the rule for major enterprises, particularly at critical locations. Caveat to the Caveat. If there is insufficient time to initiate a transition to a successor provider (and avoid a substantial increase in service pricing per the rates in the incumbent’s price guide), both the incumbent provider and its competitive providers likely will not propose market-based pricing and terms and conditions. Thus, the RFP should be issued in a timely manner to allow for competitive, responsive bids and for a doable transition to the successor provider(s).

Value of Telecom Consultants. There are several reasons for engaging a competent consultant. First, there are no published lists of market-based rates; carrier guide rates are rarely accepted by customers. There is no equivalent of published commodity prices (crude oil, corn or pork bellies) or web sites such as Edmunds or TrueCar for enterprise telecommunications service pricing. Even the “best of the best” telecom managers have a limited knowledge base of current market pricing; unless they have changed jobs (frequently), these persons’ pricing knowledge is limited to the company’s last agreement or competitive pricing review of 12 to 18 months ago. Experienced consultants have more insights into current market pricing.

Consultants offer two other value-added services. The first is the development of the enterprise’s demand set for its RFP. Telecom service pricing is based largely on volume, customer locations, and service mix. Two aspects of developing a demand set are determining current usage of existing services at current and planned locations (or anticipating a reduction in locations) and selecting the services (type and capacity) that the customer is looking to acquire. This entails a review of bills and invoices, existing network design, current services, expected growth or contraction of the enterprise’s requirements, and desired services. The two latter considerations are driven by the customer with input from the procurement consultants.

The second value-added is the consultant’s RFP templates. In addition to setting out the demand set and desired services, the RFP elicits information on pricing, other business considerations and legal terms and conditions. The RFP is the starting point for negotiations. The consultant’s RFP should be reviewed within the enterprise by the telecom/IT department, procurement group, legal, and, perhaps, risk management. A company may wish to incorporate the consultant’s RFP into its standard RFP documents or modify the consultant’s RFP. A related consideration to be determined upfront is the extent to which the consultant is the principal contact and whether the consultant will take the lead in discussions with the carriers.

Revenue Commitments and Pricing Reviews. Several other economic considerations are central to the business deal in addition to rates (recurring charges, non-recurring charges, waivers and credits). The first is the minimum revenue commitment which the customer commits to spend either annually or over the term of the agreement. Exclusive purchase commitments are rare. The minimum commitment level is based on projected expenditures at the proposed rates. Currently, term commitments with annual commitments for each renewal period are more common. The minimum commitment is increasingly supplemented by “incentive credits.” The best pricing or highest discount under the agreement is achieved only when expenditures exceed some dollar amount above the minimum commitment level, qualifying for the incentive credits.

Agreements also include a so-called “business downturn/downsizing” provision. This clause is triggered when unexpected reductions in projected expenditures occur due to downturns, divestitures or downsizing in the customer’s business. This clause addresses the risk of paying a hefty sum that is the difference between the minimum commitment and the actual (reduced) level of expenditures. The typical quid pro quo is an increase in rates or an increase in the term of the agreement or both.

The second major economic consideration is the competitive pricing review. These reviews are typically conducted annually or every 18 months. Involvement with consultants are often essential for the customer to have some insight into current market trends. For enterprises with stable or growing expenditures and general satisfaction with the incumbent’s services, services agreements may be extended based on the price negotiations that follow the path of competitive pricing reviews.

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Thumbnail image for Picture 16.pngTelecommunications 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