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.”