That recently negotiated contract may not produce as much savings as you expected. Similar to buying a car with hidden fees like maintenance plans and creative financing, most telecom contracts have back-end costs that can significantly cut your savings. The carriers’ contractual sticker-prices proclaim double-digit reductions knowing they will recover margin through utilizing methods and tactics that are rarely uncovered, acknowledged or challenged.

Carriers readily concede savings on high profile areas of your business to make their deals more attractive. They know these hidden methods will work to help get back what they lost.

The carriers will recover lost margin through tactics and techniques that their customers cannot easily combat. The carriers rely upon their customers not having the means to analyze pricing and invoicing or to have the leverage and precedence to stop them from employing these methods. In our consulting practice, we routinely witness the carriers using the following tools to recover margin on the “back-end” of a new contract:

• No detailed invoice reporting is available to break costs down to the lowest element in the carrier billing system with all net-effective rates. Without this information, it is impossible to target all potential areas of rate reductions, accurately calculate savings and audit the implementation of new rates.
• The carriers purposefully set high commitments compared to new run-rates. At best, the carriers have leverage to impose less favorable rates if commitments are not met. At worst, shortfall penalties.
• Carriers focus on reductions for big ticket items, but then embed rate increases elsewhere within the hundreds of price points found within the contract.
• Carrier failure to keep customers in parody with the downward movement in the market. The longer the tenure with the carrier the further behind rates will be to the average deal. The carrier is rarely leveraged to provide the same aggressive price points they offer to a new customer.
• Given the proper carrier precedence and leverage all feature charges can be waived.
• The overcharging or passing through of taxes which is at the sole discretion of the carrier, not mandated.
• Purposeful delays in the negotiation process and the implementation of the new contract rates result in months and months of higher margin retention.
• Staggered contract end-dates (non-coterminous) and bifurcated service agreements preclude clients from leveraging business appropriately, thereby lowering the potential for deeper discounts.
• Rate implementation errors which are never identified by the customer.
• Inaccurate proposal savings analyses. In our nearly decade of analyzing proposals, we have yet to find one carrier-developed savings analysis that is accurate and not tilted in their favor.

As former carrier negotiators and professional consultants, we understand these tactics the carriers use to increase your costs. G2 builds superior solutions within our negotiation process to eliminate the effectiveness of these back-end costs.

A year and a half has passed since the FCC mandated that carriers must pay Universal Service Fund (“USF”) charges for MPLS services.

The USF is managed by the USAC (Universal Service Administrative Company) and supports programs for rural health care providers, low-income consumers, schools, libraries and high cost companies serving rural areas. The contribution factor changes quarterly and is adjusted depending on the needs of the various Universal Service programs.

To understand the impact, the federal USF contribution factor for the third quarter of 2010 was 13.6 percent.

The carriers have all reacted to this surcharge in various ways. Most have challenged the FCC and/or delayed the USF filing in order to impose these taxes on their customers before they start paying it directly. In any case,if your MPLS costs have not gone up, they soon will. Whether applied retroactively or going forward, the implementation of the surcharge depends on the carrier and the contract terms of individual customer agreements. In any future contract revisions these taxes can and should be appropriately identified and may be favorably negotiated to lessen their impact.

The FCC regulations do not mandate that carriers must pass through USF surcharge to their customers. Rules simply state that the carrier must report MPLS revenue and contribute to the USF accordingly. It is simple to understand why the carriers are motivated to impose these charges onto their customers, either in whole or in part. However, these pass-through charges are discretionary. Concessions can be made and in the very best contracts, there are opportunities to decrease or totally avoid these new taxes altogether.

Reference links:

1. USF Contribution Factor and Quarterly Filings
2. Universal Service Administrative Company
3. Telecommunications Reporting Worksheet, FFC Form 499-A (2009)

Telecom has traditionally been one of the most challenging corporate expenses to fully manage. As companies grow, their communications infrastructure is often procured and ordered at an operational level to meet the needs of individual departments or projects, rather than from an organizational level. As a result, this lack of strategy has resulted in ad-hoc communications networks with multiple bills, contracts and accounts spread throughout the business. However, as global companies stated in the July 2009 study Global Telecom Lifecycle Management, their total telecom spend throughout the organization makes up approximately 1% of their total revenues and that even a small decrease in spend can provide relief to IT budgets and the corporate bottom line. This is especially true in low margin industries where reducing as little as one-tenth of a percent of total revenues could make a difference of several percent in terms of cash flow and profit.

Report details how Best-in-Class Companies using third-party telecom experts:

• Reduced Full Time Equivalents managing telecom overhead tasks by 15%.
• Cut mobile spend by 21% last year.
• Slashed landline WAN expenses by 22% last year.
• Achieved a 26% reduction in landline voice spend.
• Met 85% of contracted telecom SLAs even after cutting costs.

What industry has experienced the greatest reduction in market prices over the last decade? Like most executives, you immediately think of telecommunications. What drove these reductions? Of course the answer is simple: competition. To maintain profits and survive, the carriers have adapted by mobilizing their resources and exploiting customer limitations to minimize the impact of competition. And as a result, the conventional wisdom that a multiple carrier RFP is the best tool to maximize savings no longer holds true.

The Role of the Special Pricing Organization

The carriers all know their competitors’ prices across all average to world-class deals because, like all companies, they read the competitive landscape. To further control their highly competitive environment they have formed unique Special Pricing organizations to monitor the market, gather intelligence, control pricing, approve deals and direct negotiations. These somewhat covert organizations make all the important decisions, but customers rarely negotiate directly with them. They have complete knowledge of the market while their customers comparatively have very little. It is the job of the Special Pricing groups to hold onto margin while convincing their customers that they received the very best deal possible.

The slightest ripple of change to any price point is immediately known among the major carriers. The incumbent carriers use the information developed through Special Pricing to gauge proposal pricing so it is aggressive enough to ensure the business is won, but not too aggressive to unnecessarily erode margin. There is a significant difference between the rates carriers must offer to retain business and their leading-edge pricing.

The Pain of Network Migration

For practical business reasons, companies rarely migrate business from carrier to carrier. Transition costs are high, customer service may worsen and for those involved, time is precious. The incumbent carrier – regardless of what is ever communicated by the customer – understands they will likely win the business regardless of the competitive environment.

Most customers change carriers due to an overall dissatisfaction with their incumbent, not solely because of savings offered by the competition. The non-incumbent carrier Special Pricing groups will price proposals just below the incumbent to gain credibility and earn goodwill, but know all too well their changes of winning are slim. Look back on your own experience with prior RFP negotiations and this pattern clearly emerges.

RFP Expectations vs. Reality

Conventional wisdom states that a competitive environment is the best tool to drive down telecom costs. However, customers often misunderstand the sophistication by which the carriers control their market and how they use the pain of changing carriers to their advantage.

Because the incumbent carrier knows how their competition will price, they never have to offer as much savings as the non-incumbents due to migration costs. The non-incumbent carriers will never disclose their best pricing for two reasons. One, there is little chance they will win the business no matter how aggressive they price a deal, and two, exposing their best pricing only serves to further erode the market and existing customer profits.

What is the Solution to Maximize Savings?

The carrier methods are highly successful and at any given time most negotiations yield only average results. The carriers only provide their coveted best pricing when leveraged to meet specific leading-edge rate requirements. These rate requirements must be generated from highly credible Benchmark Intelligence obtained through performing hundreds of current and aggressive carrier negotiations.

Special Pricing will respect their customer’s mastery of the market and logically recognize that the requirement for best-in-class pricing is demanded from all carriers. No carrier will risk the competition meeting these requirements. With the veil lifted, the carriers are stripped of their power to withhold rates and the leverage is now shifted to the customer.

A well-respected, nationwide research firm recently interviewed our company for a comprehensive study they are releasing in the fall. The purpose of the study is to define where businesses can find the greatest savings, in the shortest time, with the fewest resources and the smallest impact on business. The state of the economy commands no time is wasted introducing one of their primary findings.

Mid-Term Telecom Contract Negotiations can provide immediate savings in one of your largest costs of doing business. This project can be completed in as little as six to eight weeks and is essentially a financial exercise because there is no impact to your carrier relationship, strategy or infrastructure.

As professionals we negotiate hundreds of mid-term, incumbent-only negotiations year after year. Our results in the first two quarters of 2009 shows evidence of greater reductions in mid-term negotiation savings than over any other annual period. Compared to 2008, average mid-term client savings was up 18% above our trending over the past decade. The carriers do not operate in a vacuum safe from the effects of the economy. Just as their enterprise clients are dealing with financial strains the carriers themselves are saddled with revenue and operating expense concerns. It is evident that the carriers are highly motivated to minimize client churn and secure long term revenue through extended client agreements.

Consider the following key elements when evaluating this opportunity to reduce costs:

• Contract pricing, terms and conditions change, not infrastructures or carriers.
• A competitive RFP is not necessary to leverage carriers for world-class pricing. (Seehttp://www.g2inc.com/endterm.html for more information)
• Term extensions may not be required and would only impact business if your long-term strategy required a major network migration.
• If the negotiation process is properly controlled, savings can be realized in as little as 60 days.
• Any delays result in lost savings that can never be recovered.
• Existing carrier commitments can be minimized and improved.
• Corporations may employ various methods to decrease costs, but most of these exercises result in harsh penalties or cost outlays – telecom negotiations do not.
• Pure upside, no impact to business, very little risk.

Mid-Term negotiations are necessary to truly maximize long-term savings. A profound misconception regarding mid-contract improvements is the belief that carrier leverage only exists in a competitive environment or at the end of contract term. Conversely, skilled negotiators can impose proper pressure and motivation at any time on the vendors to produce leading-edge pricing and best-in-class terms and conditions. The business proposition is simple: why wait for savings that you can have today.