Telecommunications Services Agreements

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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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A guiding principle for attorneys and their clients when negotiating telecommunications services agreements is the four corners defense.  No, not the end-of-game defensive strategy devised by the legendary Dean Smith for his UNC basketball team, but the straightforward strategy of keeping the terms and conditions of telecommunications services agreements within the four corners of an agreement.

Due to deregulation and migration to IP-based services, telecommunications tariffs have largely disappeared.  The process started over twenty years ago.  In the United States, local exchange TDM voice services, DS-1 and DS-3 special access services and some intrastate interexchange voice and private line services remain tariffed.  Consistent with FCC decisions dating back to the 1990s, the major wireline and wireless carriers and the MSOs have replaced tariffs for telecommunications services with a combination of end-user (consumer, small business and enterprise) agreements and online service guides.  Broadband services have always been offered through some combination of end-user agreements and online terms and conditions.

These service guides were initially required by the agency to disclose standard prices for de-tariffed services and to be made available to the public at the carriers’ principal offices or online.  The scope of the terms and conditions in online services guides has expanded substantially and, in many cases, replicates the one-sidedness of tariffs.  For enterprise customers, service guides currently offer the services providers’ service descriptions, service level agreements (SLAs) (sometimes), standard rates and charges, and policies such as the Authorized User Policy (AUP) for Internet access service.  Several services providers also post a comprehensive set of general legal terms and conditions and related definitions.

Several online service guides are almost impossible to search.  URLs in customer agreements related to potentially relevant online web pages often prove to be dead-ends.  However unfriendly the online design and integration of service guides, the overarching concern is that services providers reserve the right to modify unilaterally all aspects of their service guides including service descriptions, SLAs, pricing schedules, privacy and authorized user policies (AUPs) and, as applicable, the provider’s online general terms and conditions.  Some services providers insist on an indemnity from customers for violations of the provider’s AUP for which the provider reserves the right to modify at any time.  In some instances, the general terms and conditions in the services guide not only conflict with the terms and conditions in the executed agreement, but may impose additional or supplemental customer obligations and conditions that are not readily trumped (excuse the pun) by a standard precedence clause in the executed agreement.

Some services providers push the envelope even further, asserting that the customer’s sole remedy for services providers’ unilateral changes to the service guides that are “material and adverse” to the customer is the customer’s right to discontinue the affected service on sixty (60) days-notice.  Apart from excluding the customer’s right to damages, replacement services to multiple customer locations (sometimes a hundred or more sites) cannot be sourced, provisioned, and tested and the customer’s traffic cannot be reliably migrated to replacement services in sixty (60) days.

This brings us back to the four corners defense.  The agreement executed by the customer and the services provider should provide for fixed rates, as opposed to percentage discounts of the rates in the online services agreements; services providers invariably reserve the right to change the rack rates in their service guides with virtually no notice.  The written agreement should also exclude “shadow” general terms and conditions in the service guide as opposed to relying on a precedence clause.  The minimum response to the services providers’ provision authorizing changes to the service guide that are “material and adverse” to the customer is to secure a six-to-twelve-month transition period to migrate to replacement services, not sixty (60) days.

There is one caveat on changes in wireline services. The major telecommunications carriers are now transitioning their networks from TDM technology to IP-based services.  (The MSOs’ networks are largely IP-based.)  The FCC is accommodating the carriers’ efforts to minimize regulatory delays and burdens on ILECs in implementing this transition and in replacing copper loops with fiber or fixed wireless technologies.  The core networks of the major services providers are well along in this transition, but the transition in special access services varies considerably in terms of location and the ILEC provider.

Enterprise customers should press their wireline services providers on (i) the status and projections for completing their IP-transitions, and (ii) the transition plans for the ILECs from which the services provider will be acquiring special access services.