Special Focus: AT&T services under the new boss

Ever so slowly, the way users negotiate for and buy services from AT&T is changing.

The arrival of C. Michael Armstrong as chairman and CEO of the telecom behemoth has accelerated the process of bringing AT&T voice and data services under one umbrella.

Despite that effort, service and support from AT&T are still fragmented, and billing platforms are still largely balkanized. AT&T continues to bill voice and private-line services on one platform, and frame relay and ATM on another.

But when it comes to purchasing the services, AT&T now is rolling almost all its key services under one contract, known as OneNet. The next time you negotiate a contract to purchase AT&T services, it very likely will be a OneNet contract. The exceptions are if you're one of the 150 or so users with a Tariff 12 deal, the original comprehensive contract that's now gone out of favor for new customers, or a smaller business with few advanced data needs.

In the early to mid-1990s, OneNet combined high-volume outbound and inbound voice services. But in 1996 and 1997, AT&T added private lines, frame relay and many other services to the bundle (see graphic).

The idea behind loading so many disparate services onto one contract is to combine the traffic volumes of each to achieve the largest possible amount. In turn, that high volume almost always generates the largest possible discount. In exchange for the price benefit, you essentially have to put your voice and data networks on parallel timing tracks.

In fact, since Armstrong arrived last November, AT&T has added its rapidly growing wireless business - cellular and personal communications services - to the OneNet package. The services are available to customers who sign up with AT&T as a national wireless account.

"We're now seeing a big shift to OneNet as customers' [existing] contracts come due," says Mike Chaplo, AT&T's director of marketing for voice services.

But insiders describe Armstrong's role as having much less to do with drawing up service bundles than with fostering conditions needed to make the bundles work against the competition.

Therefore, Armstrong's two priorities are: rapidly building out AT&T's overstrained network to handle the extra demand generated by the new supercontracts, and dramatically shaving costs to pay for the discounts.

Although he's been in office for more than five months, nearly all of Armstrong's work to cut costs is still ahead of him. Armstrong's January announcement that he will reduce AT&T's work force was greeted with some skepticism. That's because former CEO Bob Allen's work-force reduction plan, which got him on the cover of national newsmagazines in early 1996 labeled as a "Corporate Killer," didn't significantly reduce AT&T's expenses.

For example, in the fourth quarter of 1996, AT&T's selling, general and administrative expenses represented 29% of revenue. By the fourth quarter of 1997, those expenses had declined to only 28.4% of revenue. By the end of 1999, Armstrong wants to reduce those expenses to 22% of revenue.

How is he going to get there from here?

The top 450 executives are under a pay freeze.

Some 10,000 to 11,000 employees, largely middle managers, are getting an enriched pension incentive to leave the company.

Approximately 5,000 to 7,000 employees will leave under what Armstrong calls "managed attrition."

Armstrong must then take some of the resulting savings to buy hundreds of new edge switches to take the strain off the T-1 ports on AT&T's core switches, some of which have run out of capacity (NW, Feb. 16, page 1).

But assuming Armstrong has enough money left over to meet his stated goal of reducing prices for end users, consultants say some new rules will apply when negotiating contracts with AT&T.

Richard Kuehn, president of RAK Associates, in Cleveland, and a long-time consultant on network services requests for proposals, points to the typical AT&T multiyear contract clause that requires users to meet a minimum annual commitment (MAC) to obtain a negotiated discount.

According to Kuehn, if AT&T prices drop, users could really be tripped up because they would have to boost their traffic volume each year simply to meet the MAC. That would occur at the very time users may wish to hand off extra traffic to new national and local carriers coming on the scene.

The solution? At least for the voice and dial-up data portion of the contract, users could ask AT&T to write the MAC in terms of minutes of traffic rather than dollars, Kuehn says. That allows users to make their commitment based on what they expect their traffic levels to be each year, without making it a guessing game of which way prices will go.

Kuehn applies a similar logic to another favorite AT&T contract clause - "monitoring conditions." These are clauses that state a user's volume must fall within certain parameters. For example, one user's contract might specify that 90% of traffic must move during peak businesses hours, while another user's contract might state 60% of traffic must travel during off-peak hours.

These monitoring conditions originated because AT&T still must file so-called contract tariffs with the Federal Communications Commission for each negotiated deal. Under tariff law, theoretically each contract tariff must be offered on demand to "similarly situated customers."

These conditions severely limit the universe of other users who can hop onto the same deal. Often these users are actually resellers looking to make a profit off AT&T negotiated discount deals.

But as traffic patterns shift, a user who meets a monitoring condition at the beginning of a three-year contract may be unable to do so at the end. A classic example, according to Kuehn, would be a user who moved fax traffic off the circuit-switched public network and onto IP networks, thus missing the MAC for a OneNet deal.

The OneNet contract offers a partial solution in this area, AT&T's Chaplo says. If users want to shift traffic between different services that are part of the service bundle, there are no penalties, because AT&T does not require subminimum MACs for each separate service.

If users want to shift traffic to a non-OneNet service such as WorldNet, AT&T will generally offer to renegotiate the contract minimums, Chaplo says. One caveat: Renegotiation generally means that the clock must start over on a new contract term.

But better news is on the horizon: By the end of 1998, even moving traffic to IP nets may not be an issue. Later this year, AT&T will add three WorldNet services - Business Dial, MIS and VPN - to the OneNet contract, Chaplo says.