How CarriersTry toIncrease Your Spend in Tough Times

In a difficult economic environment, the account team’s job is to get more of your money, not less …

Hank Levine

Levine, Blaszak, Block & Boothby, LLP’

You are part of a business that exists to make money. And if you are in telecom or IT or sourcing, you’re basically viewed as a cost center, not a profit center. When the economy takes a turn for the worse, your job (at least part of it) is to help the company save money to improve its bottom line, even as the revenue side of the house works on getting more from customers.

But the carriers are also businesses that exist to make money. When the economy takes a turn for the worse, they work on getting more from their customers. That would be you. So while everyone loves to talk about alignment of interests and “strategic partnerships,” the simple fact is that when the economy is hurting, your need to save money by paying less to vendors runs smack into your telecom suppliers’ need to get more money from … you.

The core of our practice is representing large users in telecom and IT transactions. Over the years, my sense is that suppliers seem to have more insight into the strategies employed by customers to save money than the customers have into the tools used by the carriers to extract more money. The purpose of this article is to address that information imbalancelevel the playing field.

The carriers have a lot in their playbooks. Here are eightstrategies that seem to be among their favorites.

Increasefees and surcharges, or dream up new ones

If you look at their form agreements and Service Guides, one thing you’ll notice is that the carriers reserve unlimited rights to pass through (and increase) taxes, regulatory fees, and unspecified surcharges or “tax-like charges” whenever they feel like it and are not restrained by a statute or regulatory agency. And although large customers negotiate improvements in the forms (like a requirement that decreases in taxes and regulatory fees be passed through, and occasionally an offsetting credit), the carriers fight very hard to maintain their “rights” in this area.

The reason – and the result – is that taxes and surcharges comprise something like 20% of your telecom bills. For local lines and PBX trunks, the figure can be closer to 30%. And despite statutes requiring carrier practices to be “just and reasonable,” the regulators aren’t much help. When the providers’ practice of marking up universal service charges was pointed out to the FCC, the agency got very angry -- but not at the fees. It was just mad that the carriers seemed to be saying that the FCC had approved or required the markups, and rather than rein in suspect surcharges, the order it issued just said any surcharges beyond what the FCC requires had to be separately broken out and not blamed (directly) on the agency.

Charge for stuff that used to be provided at no additional charge

Always good for a chuckle until the numbers sink in. Some of this is old school – a classic example are network management reports, which are always free if you negotiate that up front, but can cost a bundle if you ask for them after you’ve inked a deal. Another of more recent vintage is charging for managing (i.e., acting as the RespOrg) on toll free numbers, even when a carrier gets the traffic directed to the number. Still another is Proactive Notification -- the carriers expect the enterprise to notify them when the carriers fail to meet one of their own SLAs; if you want the carrier to notify you, additional charges may apply. And to prove that desperate times call for desperate measures, Verizon is so enthralled by its Web portal (which has its own problems, but those are beyond the scope of this article) that it has put in its Service Guide the right to charge customers $8 per paper bill. If you get 100 bills, that’s $10K per year.

How do you fight this one? The right provision – but it’s hard to get – is an agreement in which the prices in the pricing schedules are the totality of charges that can be levied for or on the services you are buying. A decent fallback is anagreement that you will not be charged during the term of the agreement for a service or feature for which you were not being charged when the agreement was executed.

“Migrate” customers to new products by discontinuing or raising the price of old products

Another Golden Oldie, this one dates back at least to the early 1970s when the Bell System hiked the price of Centrex to “incent” customers to buy Dimension PBXs (Centrex never recovered). The same technique was used to get rid of low bit-rate private lines and X.25 Service. Now it’s being applied to frame relay, which Sprint has expressly said it will be discontinuing and Verizon and AT&T are discouraging customers from renewing, much less buying.

To be fair to the telcos, the effects of Moore’s Law are such that for at least the last decade,when customers migrate to a new service or platform they generally save money immediately or very quickly, although the effects are often masked by rising demand.

Quote a stripped-down price for new managed services and get ‘em on the “extras”

Remember the old story about the customer that aggressively negotiatesd a rock bottom price for a new car, only to find it jacked up and sans tires when he comes to pick it up? “Tires?” says the salesman, incredulously. “You wanted tires with that car? Gosh, I’m sorry, but they’re extra. Of course, I do have four brand new ones right here, and I can let you have them for $600, including valves, balancing and mounting.”

In telecom the examples tend to be more subtle, but only slightly. Especially in managed service and outsourcing deals, the Scope of Work document can be as important as the contract, because if it’s not in the Scope of Work and you need it, the carrier will charge you extra for it. If you buy managed services, here’s a partial list of additional charges that may apply even though they are virtually never listed in the RFP response:

* Out-of-Band modems and POTS lines to enable monitoring and management of MES [[DECODE ACRONYM]] managed hardware;

* Additional migration or transition charges per device to bring the client hardware under management, build the asset management dbase, etc.;

* Quoted MACD (moves, adds, changes, deletions) pricing that excludes the cost of the truck roll and ancillary cabling.;

* Additional costs for Lifecycle Management/Account and Service Delivery teams, particularly for large enterprise customers;

* Additional charges for “enhanced” SLAs for maximum time to repair and “dedicated management servers” in the supplier’s network operations centers.

And here’s a list for MPLS transport non-recurring charges that you will not hear about until you are billed for them:

* Port Change Charges

* CIR/CoS Change Charges

* Port Diversity Activation Charges

* POP Diversity Activation Charges

* CoS Activation Charges

* CoS Deactivation Charges

*Per Port Cancellation Charges

*Per Port Expedite Charges

* Charges for changing a provisioning date

There are lots of other examples. One is site surveys for wireless LANs. The WLANs are part of the deal but the site surveys, which the carrier requires, are not -- although they are available for a ‘slight’ extra cost. Another is “cheaper” international TDM local access that provides no uptime coverageor assurance outside of normal business hours.

Several tactics are related to this play. One is to price specified initial sites reasonably, but require any additional sites to be “custom priced” and set those prices higher than the price for comparable locations in the original agreement. Another is to dangle offers of scope, presence/coverage, or capabilities the carrier doesn’t really have, highlighting the exclusions or additional costs only as the client becomes more committed and deadlines approach.

Keep the customer from going to market with preemptive renewal offers.

The “sweet spot” in terms of customer leverage is usually around a year before a deal expires – earlier is too far away, and as you get later the customer’s ability to actually move traffic/networks without disruption or a dreaded fire drill begins to erode. At the same time, customers who are legitimately “in play” in a down market draw aggressive offers like ants to a picnic. So it’s no surprise that about a year before a major network deal ends the incumbent will show up with a speech about how the carrier wants to “do something” to help the customer in these tough times, so it’s offering a “really aggressive” offer that will produce savings now – not 12 months from now. As part of the pitch (or a week month later, if the customer doesn’t bite the first time) the carrier will throw in a “signing” or “loyalty” bonus in the form of a one-time credit that will effectively lower the customer’s costs in the current fiscal year.

The catch, of course, is that the preemptive offer isn’t really very good – it’s usually 15-20% above “market” in a world where non-hated incumbents can get away with 5-10% over market in competitive situations (because of the cost and hassle of migrating). The carriers get away with this because the improved pricing they are offering is pegged to giving the customer a modest reduction in what it is paying now, not a good price compared to the market.

And that free loyalty bonus is actually very expensive – our estimate based on hundreds of deals is that the carrier typically prices to get three times the bonus back over the life of the deal.

Get tough on rate reviews, especially for services that can’t be moved and customers with little cushion

When things were flush there were 4 or 5 first tier carriers, and it wasn’t uncommon to see Moore’s Law and robust competition drive annual price reductions of 10-15% almost across the board. Nowadays, with AT&T and Verizon trying to act like a duopoly and Sprint weakened,5-8% is more common. Drill down a level and commodity voice rates can be even stickier, althoughdouble digit reductions are still the norm for newer, more rapidly growing services like MPLS.

And the carriers like it that way, so they are actively promoting the notion that prices are “firming,” and actively trying to make that so. The principal victims of this are the companies who have already committed 90% of their traffic for the next two years (or accepted circuit terms that accomplished the same thing even as some exec was blovating that he’d gotten a “no commitment deal”).If you have a 50% commitment and few circuit terms, you can demand market rates as the price of not moving your cushion to a carrier that will give them to you those rates now.

The carriers are also stingy on rate reductions when the subject is traffic/networks that can’t be moved easily--for real (complex data nets) or for cultural reasons (“800” traffic to call centers). There are ways to beat this, but they require skill and perseverance. You can have two MPLS providers, for example, and award new sites to the one that offers better pricing and terms, but you or a third party acting for you are going to have to do the Network-to-Network Interface.

Hollow Out the Account Team or SLAs

When times get tough, the vendor’s account team that was dedicated in the “good times” is stripped down, and customers are forced to work the phones for support issues, orders, trouble tickets, billing issues. Big savings for the vendors: much more hassle for the customer (every problem has to be re-explained from the beginning on every call). … Even if you can keep a real person with an actual name as a point of contact at the vendor, that person may be assigned multiple clients, so response times suffer, it takes forever to resolve billing issues, etc.

Hollowing out the SLAs is like hollowing out the account team. If the carrier can put in enough exclusions, limitations, etc., they it can trim service to the bone (wringing out cost) without incurring the risk of having to pay credits.

Slow Things Down

There are many examples of this, but two are worth highlighting. First, when it comes to billing issues, response times are l e n g t h e n i n g. That makes it increasingly difficult to track billing issues, since you have an ever-growing list with no resolution.If you insist on opening a ticket, that adds another two or three weeks.

Second, incumbent carriers will delay final contract negotiations on a new deal (whether a renewal or competitively procured). This delays rate reductions and, if the customer is anxious to sign to book savings, can be used to wring extract additional concessions. Anything the customer asks for, however reasonable, has to be “escalated”, and escalation takes weeks. As long as the customer is drawn in and effectively has nowhere else to go without starting over, this is costless to the carrier. And a fewmonths of delay per contract multiplied by hundred of deals can represent hundreds of millions of additional revenue per year to the carrier.

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Conclusion

Nothing strengthens a defense like a look at the offense’s playbook. Understanding what the carriers are trying to get (more revenue) and how they are trying to get it does not guarantee that you will foil their strategies, but it’s a good start.

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