The Telecom Contract--the Final Piece of the TEM Triangle
June 28, 2006
By Kevin Dunetz, Chief Technology Officer
Rivermine, Inc.
In my last two articles (1, 2), I described the three critical data sources needed to maximize your savings through Telecom Expense Management (TEM): Inventory, Invoices, and Contract/Tariff Information. I call this the TEM triangle.
Inventory is needed so you can understand what you should be paying for and how your services are configured. Invoices are needed so you can understand what the carriers are billing you for. Contract/Tariff Information is needed so you can verify that the carriers are billing you correctly according to the contract/tariff. Just like a 3-legged stool…if you lose one of the 3 legs, the stool falls over.
The final piece of the triangle to discuss is the value of managing your Telecom Contracts more effectively.
Overview
In the telecom industry, there are different ways that the price of service is determined for enterprise customers. LEC pricing is largely based around fixed tariff rates that are agreed to by Public Utility Commissions and the FCC (News - Alert). In the Long Distance (LD) and Wireless sectors, where things are not as regulated, pricing is largely based on negotiated contracts. There are two primary types of contracts available: Service Provider and Circuit/Service contracts.
The Service Provider contract is more about setting pricing and terms/conditions for a customer’s entire portfolio of services purchased from a single service provider. The Circuit/Service contract is more about setting pricing for individual circuits when the customer is committing to a 1-10 year commitment to hold onto that circuit/service. A typical large enterprise will have a handful of Service Provider umbrella contracts, but potentially tens or even hundreds of individual circuit contracts.
Circuit Contracts
Circuit contracts are generally put in place with LECs and or providers where you only order a few circuits. There are two important things that have to be tracked on circuit contracts: the renewal date, and termination liabilities. Circuit contracts are usually put in place to guarantee that the customer holds a circuit for some extended period of time, usually greater than two years. In exchange for that commitment, carriers will give a discount to the customer as well as waive the install charge.
When a circuit contract expires, it is very typical for the carrier to begin billing the customer at the month-to-month rate, which can be much higher than the multi-year contract rate. It is for this reason that the customer really needs to make sure they renew their contract at the end of the commitment period.
The problem with doing this is that an enterprise might have tens or hundreds of circuit contracts all of which begin and end in different months. It can be hard to track when a circuit contract needs to be renewed. An automated Telecom Expense Management solution can really aid in the tracking of circuit contract renewals.
The other Circuit contract issue to understand is the termination liability. Termination Liability is the fee you must pay if you disconnect a circuit before the end of the contract. It is very important that your provisioning team knows what the termination liability is on a circuit before they disconnect it, because it might be quite costly to disconnect it before the contract is over. In some cases, the company might have to pay the full amount of the circuit for the remainder of the term as well as the original waived install charge.
Service Provider Contracts
Service Provider Contracts (also known as Master Service Agreements) are usually negotiated with your LD and Wireless providers when you are able to commit a majority of your telecom spend to one provider. They are umbrella contracts which incorporate many dimensions of your relationship with the provider including: Price, Annual Commitment, Service Level Agreements (SLAs), Discounts, and Bonus Credits.
Price, SLAs, and Discounts are well understood elements to most. The Annual Commitment is just specifying how much of your telecom spend you are willing to commit to the service provider each year. Obviously, the more you commit the better price you will receive. Failure to meet your Annual Commitment can have associated penalties so it is very important to make sure you send enough business to your primary carrier to cover your commitments.
You will want the ability to see where you stand with respect to your Annual Commitment every month so you guarantee you will not miss your yearly commitment. Your TEM solution should provide this capability. Bonus Credits are given to you by the carrier at certain check points during the contract life cycle. It is very common for enterprises to negotiate these credits but never get the benefit of them because they have no way to track when and how those credits will show up.
Get Ready for Contract Negotiation
Negotiations of your carrier contracts are one of the major areas where you can obtain significant savings. As competition heats up, the prices on certain telecom services such as LD and high bandwidth point to point services has come down immensely over the last 10 years. Every time you come to the table again to renegotiate your contract, you should see a decent decrease in your telecom spending.
There are different degrees of effectiveness achieved when negotiating a new contract. Contract negotiation is best executed by people who work with the different carriers on a regular basis, so consider outsourcing that function to a consultant or a company that specializes in Telecom Contract Negotiation. You will need bench-marking data so you know what the best rates available are. You might also want to consider using Reverse auction technology to get the best price from the vendor.
Please remember that negotiating a contract is not 100 percent about price. You might be willing to pay more for your network if you get better service levels agreements or access to more advanced features.
Another important element to negotiating the best contract is having a decent handle on your inventory and your traffic patterns. If you’re utilizing an automated TEM solution, you should be able to easily pull up that type of information. A good inventory makes it easier for the carrier to price out your network because they know exactly how many circuits you actually need and how they are configured.
Based on a good Contract Negotiation, you might be able to obtain about 30 percent savings when negotiating one contract. Please keep in mind that this savings is only for one carrier, and not 30 percent across the board. Your overall telecom spending might be reduced by only 10-15 percent by negotiating your main LD contract—assuming that half of the spending is associated with one vendor.
Contract Addendums
Frequently, an enterprise’s telecommunications needs change after the contract has been negotiated and signed. This doesn’t mean that you can no longer adjust your contract terms. You can add an addendum that might include an additional Cost Per Minute rate on a new country you started calling or a new Intrastate in a new state where you opened an office. Always look for things on your invoices that are not billed on contract and have them added if possible.
Contract Validation
Let’s say that you’ve just negotiated a great contract. Is the work over? No! You still need to make sure that the carrier is billing you the correctly negotiated rates, and you’ll want to verify that the billing changes accordingly after your new contract is implemented. Incorporate the process to validate your contract rates on a monthly basis for the duration of the contract.
Another thing you will want to validate is that you get your negotiated Bonus Credits at the correct intervals. It is very typical for enterprises to negotiate these credits, yet never reap the actual financial benefit.
Validating your contract rates is one of the largest savings achieved in the audit portion of your TEM solution. Of the 10 percent or so of potential audit savings, about 4 percent will be based on identifying contract pricing errors and ensuring that you are getting your bonus credits.
Conclusion
A substantial amount of savings can be achieved through good contract negotiation as well as validating the contract rates. Negotiating contracts successfully relies on having complete data sources for inventory, usage patterns, benchmarking data, solid negotiators with experience negotiating dozens of telecom contracts, and great Telecom Expense Management software that will allow you to track your inventory, analyze your invoices against contract rates every month, and run electronic RFPs/reverse auctions during the sourcing process are all part of completing the picture.
When you pull a great inventory together with powerful invoice validation, and contract negotiations, you will be at the point where you can get the ultimate savings in your TEM initiative.
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Kevin Dunetz is CTO at Rivermine. His company provides automated telecom expense management solutions to enterprises. For more information, visit www.rivermine.com.