Who would ever run a race where the rest of the field gets to start halfway closer to the finish line?

Not many. This is why the players in our niche industry don’t negotiate from carrier proposals – those deals that represent your best efforts to get savings on your own. The low-hanging fruit is gone. The race seems over before it begins. You really have to perform to win.

But for those in peak condition, the race can change. It becomes a relay. True experts don’t give up before the race starts; they look for the baton from their teammate and sprint to the finish line.

Having a professional telecom contract negotiator evaluate your telecom carrier proposals and finish negotiations offers your company the best of both worlds: you get to claim savings through your own efforts and any additional improvements earned by a third-party is pure value because it is savings otherwise kept by the carrier.

However, this service is little known or practiced – because most consultants avoid it. It is easier to negotiate the first dollar of savings instead of the last. Taking on 11th Hour engagements requires the confidence and ability to improve upon what may already seem like remarkable savings.

There is a significant difference between what a company can achieve on their own versus the results of a truly professional negotiator.

Look into this service and ask these questions. The best negotiators will give you the following answers:

• My carrier proposal already represents a lot of savings. Why should I wait to sign? An assessment to determine if a worthwhile savings opportunity exists will only take 48 hours.
• How much will this savings opportunity assessment cost? Any reputable firm will provide the analysis at no charge. The onus is on them to prove they are worth being hired.
• I have leveraged the carriers through a competitive RFP, how can any savings remain? A third-party negotiator is armed with the resources and market intelligence to improve upon what seems to be significant savings. The least we have ever seen a proposal improved is 12%.
• How do I know the savings you claim is real and significant? Here is an easy test: the consultant should only work under a performance-based or incentive fee basis. No one will take on work where they have no hope of getting paid.
• How much time is it going to take for someone to take over negotiations and finish the job? A true professional is going to work more quickly than most –even in a complex environment such as telecom. Expect the project to take two to three weeks.
• Isn’t that two to three weeks a lost opportunity cost? Yes it is, but the return of additional savings will easily eclipse that loss. And, a professional will likely make up for lost time through the carrier contract review and approval phase.
• I’m experienced and negotiated the carriers hard, how is there more? The carriers are experienced, too, and motivated to keep margin. By definition alone, on any given day most deals are average. Size, competition and carrier relationship do not matter. Truly, without evaluating from fact-based, recent and aggressively-acquired market intelligence it is all guesswork whether a deal is bad, good or great.
• Do I have to switch carriers or modify my network? No, this is a financial exercise to maximize savings and improve contract terms and conditions. Your network and business are not disrupted.
• Will you supply me references for clients where you conducted the same type of 11th Hour Negotiations? A consultant should have plenty of references who are your peers and from companies that are well-known, capable and with complex networks.

In the traditional world of auctions, no matter what’s up for bid—art, memorabilia, cars, jewelry—there can only be one winner, one successful bidder. Everyone else in the room is, by definition, a loser.

When it comes to telecom contract negotiations, e-sourcing (AKA reverse auctions) works much the same way with one exception: There is still only one winner, but it’s always the same winner—the telecom providers.
And the reason is simple; the business model itself is flawed for something as complex as enterprise telecom services.

E-Sourcing: The Big Disconnect

Look at any reverse auction interface closely and you’ll soon see what’s missing and why e-sourcing commercial telecom services will always fail to yield maximum cost savings or industry-leading terms and conditions.

Benchmark Intelligence

An e-sourcing application doesn’t include benchmark intelligence—the precise industry insight you need to put your telecom service terms into context. An e-sourcing application isn’t designed to include this type of information because it can’t. It has no view into where the industry stands across the entire spectrum of telecom service terms.

Carrier Relationships and Project Leadership

Reverse auctions cannot factor in the types of soft negotiating skills that produce hard results when skilled negotiators apply them. What are they supposed to have, a box you tick off that says, “We’ll go somewhere else if we don’t like your bid.” It doesn’t work that way.

Carrier Processes

Every carrier has its own set of internal processes it uses to develop pricing schemes. Not one of them is going to share those internal guidelines with an e-sourcing application where their competitors can see them.

The telecom carriers understand all too well the leverage they have because migrating to a new service provider is a costly and risky proposition for an enterprise. That leverage effectively means they are not going to provide (or divulge to competitors) their best prices. It dilutes their profit margins in a public arena where they expect to lose more than 90 percent of the time. From their perspective, it’s not worth it. They either won’t submit a bid, thereby decreasing the competitive environment or, they may submit an unsustainably low bid strictly to disrupt the process and if selected, withdraw the bid or tack a flurry of fees onto the contract to recover their losses.

Dialing Back on Reverse Auctions

More than a decade old now, reverse auctions may be successful in some commercial situations but not for telecom services. They are a simple tool unfit for a task as complex as enterprise telecom service negotiations. None of the intangible assets that yield the greatest savings and the best contract terms and conditions are part of an e-sourcing application.

Given the complexity of commercial-grade telecom services and the wide variations between Tier 1, Tier 2, and Tier 3 carriers, a reverse auction tool cannot provide a true apples-to-apples comparison between providers and their bids. There are always factors, terms, and conditions beyond what shows up on your computer monitor during the auction. This makes a productive comparative analysis virtually impossible.

Every carrier has a Special Pricing organization, a strike team, if you will, that has the keys—and the authority—to the carrier’s best pricing packages. No carrier is going to implement that as part of their reverse auction bidding process. They can’t; it takes a team and a whole lot of up-the-chain-of-command approvals to affect that.

Often, a telecom services contract is about more than just price. There are dozens upon dozens of terms and conditions that impact the contract and, in turn, the price. A reverse auction cannot factor in those fine points. Likewise, a reverse auction has no negotiating skills; it cannot communicate to the provider many of the subtleties a skilled negotiator brings to the table, the likes of which add substantial value to the terms you finally settle on with a carrier.

You could try to e-source your next surgery, but even if you could, you probably wouldn’t; there are too many things to consider. You might be able to reverse auction your child’s college education, but you won’t. Too many variables, too much riding on it.

Much like surgery or a four-year investment with long-term consequences, telecom is a vital part of your operation. It’s a critical piece of your infrastructure, plus it’s a fixed line-item in the budget. And like those two endeavors, telecom services aren’t well-suited for something as simplistic as a reverse auction.

In the movies auctions always look glamorous and exciting. People with tons of money bid millions of dollars on priceless works of art.

In real life, auctions are far less appealing – or successful.

Not only are the items up for auction typically far more mundane, but the bidders are a combination of people who really know what they’re doing, the professionals, and those who have no idea what they’re doing, the rank amateurs.

The professionals—jewelers, antique dealers, auto dealers—stop bidding when the bids exceed the point where they can profit on the purchase. The rank amateurs drive the price up, often beyond what it’s worth or what you pay for a similar item at a store or online.

Auctions for telecom sourcing, e-auctions, tend to fall in the latter category. The perils are the same but the stakes are higher as anyone at a Fortune 1000 company responsible for telecom contract management can tell you.

Telecom Contracts Are Simply Too Complicated

It’s not that e-auctions can’t or don’t work; they can be very effective for simple, specific things. An example might be a 10 mm stainless steel screw used in manufacturing. You set the specs— 10 mm in length, stainless steel material, a pan head.

But telecom contracts are complex products. There are a handful of professional players—the telecom providers—and they know the ins and outs of the game. Heck, they write the rules of the game. And the rules say, keep pricing close to the vest, make apples-to-apples comparisons difficult, and rely on the fact that most customers have limited experience in wireline or wireless contract negotiations making them vulnerable to all sorts of one-off hidden charges built into the contract.

Because a telecom RFP is a complex document, there are lots of opportunities to negotiate the finer points of the contract.  To negotiate the best deal you have to evaluate all financial concessions beyond just targeted price points.  A carrier contract contains literally hundreds of price points, features charges, taxes and possible hidden fees.  E-Sourcing does not address each and every rate or charge.

There’s also no place in an e-auction for you to let your current carrier know you’re prepared to walk away from the relationship if the pricing isn’t right. There’s no mechanism in an e-auction that lets the carrier’s sales team consult with the executive finance team to get you better pricing. And, without the blessing of the carrier’s finance team, the e-auction chips will fall where they may. And where those chips fall are usually not to the customer’s benefit.

E-auctions also do not necessarily attract the best bids. Incumbents understand that customers are aware of the migration costs involved in switching carriers. Non-incumbents recognize the advantages an incumbent has for those exact same reasons and are therefore reluctant to publicize their best prices, which would further commoditize rates and erode margin, in an environment where they are likely to lose 90 percent of the time.

Bid Like Your Job Depends On It… Because It Does

Just like in the movies, the prospect of an e-auction for telecom sourcing can seem exciting. But the reality of telecom contract management is much more sobering. A skilled telecom contract negotiator can help you navigate the finer points of the agreement and put pressure on carriers where they’ll feel it most. Because they have a broad range of experience and knowledge, you’re not going into a negotiation unarmed and uninformed about what’s possible.

E-auctions have their place in business. Telecom contract management is just not one of them.

Talk is not cheap. Ask anyone at a Fortune 1000 company responsible for overseeing the enterprise’s telecom sourcing or telecom contract management.

Not only is it not cheap, it’s as complex as can possibly be—which is precisely how the telecom providers like it. The more complex the telecom agreement, the easier it is for them to add fees, hide costs, and generally jack up how much you pay to connect your company to your customers.

But, while talk may never be cheap, it can be cheaper and your telecom contracts made simpler and more easily managed.  The key is understanding the rules of the game, something the telecom giants have worked diligently to keep from you by creating complex, (pardon the pun) circuitous, contract language, by changing those rules, and moving the goal posts at every opportunity.

Pulling Back the Telecom Contract Curtain

Some politician (let’s not quibble who) said, “You have your known unknowns and your unknown unknowns.” And whether war or politics (or telecom cost control, for that matter), unless you know what the telecom providers know, you can’t possibly know how you’re being taken to the cleaners with your telecom contracts. That’s where a knowledgeable telecom contract negotiator can help. Not only do they see hundreds of telecom contracts to understand what’s possible, but the good ones have staff that have been on the inside, who know firsthand what to look for. In contracts of any kind, it’s often not what’s on the page, but rather what’s left off the page that will do you in.

Consolidating Contracts

Because your business—every business—evolves, your needs change over time. And, technologies and markets evolve too. The result is often a mishmash of telecom sourcing with multiple, overlapping start and end dates for the various pieces of your telecom services, from wireless contracts to long distance services, conferencing to data transmission services. A knowledgeable telecom contract negotiator can help you consolidate contracts and bring about simultaneous, coterminous agreements, regardless of where you are in the telecom contract cycle, with one or multiple carriers.  Internal and external carrier consolidation opportunities should be evaluated; they are powerful steps that can be taken to maximize savings while minimizing liabilities.

Mind the Gaps

One of the ways telecom costs escalate is when services are added without being made part of the master service agreement (MSA). It’s simple. Where you might be inclined to give your best customers your best price because, you know—they’re your BEST CUSTOMERS—telecom providers are often not so inclined. So, you call your rep and ask them to add a feature. They say, “Thanks, I’ll take care of it,” and there you go. You get top-drawer rates for your contract-negotiated services and you pay top dollar for the feature you just added because it wasn’t incorporated into the MSA and therefore doesn’t leverage your entire book of business with the carrier.  Introduce an environment where sourcing and carrier management is decentralized and these gaps only grow greater resulting in substantial lost opportunity costs.  Internal politics and business unit structures aside…leverage what you have.

Say What?

Telecom contracts are some of the most cleverly constructed documents around. Add the layers of complexity that come with using multiple carriers and adding or changing service needs midstream, and suddenly, telecom sourcing begins to resemble negotiations more common in international treaties than those among business partners. But, such is the way things are.

Remember, this is the information age and information is power. Know what you know and recognize what you don’t know when it comes to drafting your telecom RFP and negotiating your telecom contracts. Then, hire someone with the expertise to at least put you on a level playing field with the carriers. That’s the only way you’ll get some straight talk from them.

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.