Minimum Revenue Commitments

Subscribe to Minimum Revenue Commitments
Photo of C. Douglas Jarrett

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

Photo of C. Douglas Jarrett

The broad acceptance of Multi-Protocol Label Switching (“MPLS”) service by enterprise customers warrants a “fresh look” in negotiating three important aspects of Wireline services agreements.  The discussion on service provider transitions applies to Wireless services agreements, as well.

1.  Addressing Chronic Service Issues.  The principal benefits of MPLS service are “any-to-any” connectivity, scalability and ease in adding or deleting sites.  Readily available CPE supports voice-over-MPLS.  These benefits are maximized when MPLS is offered by a single carrier, although multi-national firms may maintain region-specific MPLS networks and some large enterprises maintain several MPLS networks (each provided by a different carrier) for redundancy purposes.

A glaring weakness in carriers’ standard services agreements is the failure to address reasonably the risk of chronic service problems in an MPLS environment.  The carriers’ standard (and antiquated) “partial discontinuance” clauses are limited to problems associated with services to a single customer location; potentially relevant for high volume call centers utilizing inbound toll free services, but not an MPLS network.  Even though Service Level Agreements (“SLAs”), such as mean time to repair and site availability are customer-oriented, the metrics remain largely site-specific.

If  MPLS service to priority customer locations (data centers or corporate offices) are subject to chronic outages, the enterprise’s businesses and processes will be impacted severely and adversely.  The standard carrier insurance policy (to be purchased by the customer) of redundant ports, access and routers is not the answer.  The burden should not be shifted to the customer to insure that the carrier delivers the agreed-upon level of service.  In light of the limitations on potential damages demanded by carriers and the risks associated with chronic service issues, a tailored remedy or escalating remedial responses are warranted to more equitably address the risks borne by MPLS customers.Continue Reading Three Critical Considerations for Enterprises When Procuring MPLS Services