WAN Services /

Contracts should focus on total revenue

By Lisa Pierce
Network World, 05/14/01

In uncertain economic times, it makes sense to closely examine how commitments between service providers and businesses are crafted.

These contracts commonly require a minimum annual revenue commitment for each year covered. Many require minimum or maximum volume or revenue commitments by type of service, or even by jurisdiction - for instance, outbound voice calls within a state.

The problem is in tough times, these provisions expose companies to unnecessary risk. An alternative - based on total revenue, irrespective of other variables - is worth consideration.

Let's say a customer spends $7 million per year with one of the national voice and data services providers. The client has signed a three-year plan and agreed that at least $4 million of the annual commitment will be for inbound and outbound voice services, and $3 million will be spent on data.

The customer is concerned because a growing proportion of call center traffic is being handled through its Web site. Thus, voice spending is decreasing, violating the subminimum voice services revenue commitment. However, the growth of data services is not enough to offset the decline in voice or maintain the $7 million total commitment.

The client's business is also closely linked to the economy, and if a downturn lasts more than a year, the company may have to curtail new ventures, lay off employees or sell divisions. Any such contingency will further depress spending on voice and data services.

Typically under these circumstances, an organization would renegotiate its contract and make future revenue commitments well below its historic WAN spend rate. However, this usually requires the customer to pay a higher per-unit rate - something customers loath to do. Additionally, should spending exceed the revised commitment, many providers do not automatically discount prices on the higher levels.

It's an unhappy dilemma. However, the alternative - focus on total revenue, nothing else - may help.

The organization renegotiates a contract that concentrates on the total revenue it is comfortable committing to the provider. The contract does not specify a minimum annual revenue commitment, nor does it contain commitments by service or jurisdiction.

It includes negotiated prices for the services the customer intends to use. The new agreement is in effect until the customer spends the amount of money specified, let's say $16 million.

Using our example, at current spend rates, the contract will be in force for between two and a half and three years. But, if the customer has problems and consequently reduces WAN spending, the contract stays in effect for as long as it takes to spend that $16 million.

This type of commitment avoids the ups and downs associated with a changing economy. It frees the customer from being a forecaster of future requirements. And it still provides the carrier with a predictable revenue stream.

This little-used contract approach should have far broader appeal.