Negotiating telecoms contracts can be a daunting prospect but, as David Warren explains, there's no gain without pain
Having squeezed out 'low hanging' inefficiencies, organisations are now turning to review their telecommunications cost structure on a European scale. The money enterprises spend on telecommunications services has long been considered a cost of doing business.
Yet, in today's business environment, no area of spend is sacred -- especially with expenditure on telecommunications amounting to one to two per cent of sales. A good telecommunications review could reduce the investment by 20-25 per cent. Repeated every one to two years, those savings could continue at 10-15 per cent.
In recent years, national players in telecommunications are being challenged by global carriers who, in turn, are being challenged by pan-European suppliers. Business models for pricing are being rewritten. We are juggling with 'postalisation' of rates, voice over IP, escalation of mobile usage, a switch to the receiver paying (through freephone numbers), and volume -- not distance -- pricing as data becomes the prominent form of traffic.
But there remains a corporate lethargy for action. National contracts, in many cases, remain untouched. Business users, although dictating and escalating the expenditure, are not taking responsibility for it. Telecoms suppliers are making the most of the profitability window.
Daunted by complexity, inaction is understandable. But it is better to instigate a review than to have a review instigated on you.
Having decided the time is right -- how do you get started? Renegotiation of a telecommunications contract or contracts is similar to any other legal agreement and just as serious. To embark on a review the telecoms manager(s) responsible must begin with a phase of Discovery. The Discovery Phase may need to take place within each of your operating territories. Each territory will need to work together to ensure that all parties involved are fully aware of the parameters and ambitions of the review. This first step is critical to a successful contract, as it informs you of the complete telecoms expenditure of your organisation. The fact is that most users don't know what they have, what they use and what they are paying for.
It is worth noting that decisions defining mobile needs are different to traditional voice services and very nationally focused. International mobile communications are on the increase and charges for these services are very expensive, and international roaming makes this very difficult to control. The actual charges are very dependant upon the various supplier partnerships in place in each country and the network provider used for the home network. Mobile on a European basis therefore warrants a different, but linked, evaluation and negotiation.
The Discovery Phase is followed with a renegotiation. Renegotiation should begin with a sharing of the discovery findings with the incumbent supplier(s), along with your strategic plans and projections for the future. The incumbent should be given the opportunity to respond. One time out of five the vendor team responds successfully. Often the vendor escalates the review within their organisation: if this happens 50 per cent of the escalations provide a favourable response.
Risk is a prerequisite to an effective telecom services agreement. To obtain favourable rates and concessions from vendors, telecom customers must convince vendors that they are willing to change service providers. Put simply: clients considered to be 'at risk' get the best prices.
If successful the review process can end there. But, if not, it will move on to the time consuming process of Request for Proposal (RFP), a second renegotiation, then if necessary wider circulation of the RFP, final selection, negotiation, award and conversion. One way to ease the pain of this process is to use proxy bids based on market data to test the proposal of your incumbent organisation. The results of similar discoveries conducted at other customer organisations provide a comparative context, allowing negotiations to be based on actual market rates.
Priorities in the RFP
f you get to RFP, three priorities for inclusion are: pricing linked to market rates, annual reviews and demanding quality of service parameters.
1) Firstly, with regard to pricing, the RFP should insist that vendors commit to coming within 15 per cent of the current market prices and be explicit and not tied to controlled price lists or confidential contracts.
2) The second 'must' is to include a contractual provision for annual renegotiations against market rates, to allow for adjustments in response to new market conditions and changing business requirements. Flexibility can also be enhanced through a low minimum annual commitment, which should be less than 66 per cent of expected annual spend.
3) And finally, to ensure quality of service, the terms must include non-linear credits for service outages. What I mean by this is that telecom agreements are typically structured so that, in the event of a service outage, the vendor provides 'credits' for additional service, rather than a monetary payment. If the penalty isn't sufficiently painful, the vendor may prefer to dole out credits rather than to fix an underlying problem causing outages. An effective contract must therefore escalate penalties after each outage. An escalated penalty structure provides the telecom vendor with a clearincentive to ensure that the cause of the initial outage is investigated and addressed, in order to prevent future problems. For the customer, meanwhile, quality of service is ensured.
After the RFP is prepared, give your supplier the opportunity for a second renegotiation. If this fails to achieve the concessions you require publish the RFP to the wider competition.This does not necessarily mean a change in vendor; indeed most often the incumbent retains the business.
RFP response assessment will most likely uncover two best responses with which the final negotiations take place. Both organisations should discuss the strategic view of their businesses and ensure a mutual fit in ambition over the coming years. If a new carrier is chosen, conversion must be managed as smoothly and amicably as possible. The vendor's ability to execute this conversion transparently from the end-user point of view will set the tone for the life of the contract.
This process needs to be repeated for each carrier in each territory. Phasing is important, as there may be opportunities for one supplier to offer a service across several other territories, or for one supplier to operate across all territories, in the style of an international managed service. More and more businesses, in our experience, are taking this approach.
So you have concluded negotiations and agreed on your carrier(s) of choice. But it's not over.
Carrier pre-select is another feature that is driving down telecommunication rates, as companies can use different carriers for different purpose: taking advantage of time of day discounts for one carrier, and favourable international rates for another, while using mainstream carriers for the majority of their telecommunications requirements.
A bit like deciding whether to take the train, bus or car for a particular journey, these decisions can be made on the 'fly'. There is, however, a limit to the complexity that is appropriate to build in. For the most part, large companies are continuing with single contracts with mainstream carriers, but increasingly medium sized companies are using carrier pre-select. To compete, traditional carriers must respond with favourable pricing that competes with the incentive to use pre-select.
Get out and be proactive
As customers demand more, in the coming months and years, telecoms suppliers must get out and be proactive: once a customer has started the review process the supplier is on the back foot. Carriers should take new pricing models to their customers proactively and demonstrate how they can save them money and the carrier can keep a profitable loyal customer.
Similarly telecoms manager must remember that suppliers are running profitable businesses: squeezing prices into oblivion will not do you or them any favours. Understand the true market pricing and be realistic. Forcing short-term cost cutting as far as possible doesn't work either.
Both parties want a strong ongoing relationship: for the supplier it means more business; for the customer it means simplicity. It can still be a 'customer for life' approach, this time based on open relationship building on both sides.
In summary, telecoms costs are typically one to two per cent of a company's sales. Yet most users don't know what they have, what they're using, or what they're paying for. It's not uncommon for enterprises to have multiple telecoms contracts covering the same services, and to pay several times for the same service. Effective negotiations and management of telecom contracts can have a measurable impact on a business' financial performance. Telecoms managers can drive this change and ensure a profitable relationship, on both sides.
David Warren is managing consultant specialising in telecommunications, at Compass Management Consulting, and can be contacted via tel: +44 1483 514500 e-mail: email@example.com