Secrets of the tariff game

Here's a winning strategy for getting the best telecom rates.

By BRETT MACHTIG
Network World, 12/13/99

Few people have the desire to sort through reams of tariff data, but knowing just a bit about how the arcane tariff filing system works can save your company big bucks in telecom costs.

A tariff is a document that carriers file with the Federal Communications Commission or a state public utility commission detailing the services, equipment, prices and terms it offers. Making the information public helps ensure that carriers offer the same rates and conditions to all customers. At least, that's the way the tariff filing system is supposed to work.

The reality is much different. Carriers have devised ways to strike unique deals that only apply to one customer. That's why there are an estimated 20,000 tariffs on file, more than half of which are still active. Some deals are much better than others: For a company that spends $12 million per year on telecom services, prices can vary as much as 40% with the same carrier.

The game begins when you hire an outside consulting firm to benchmark the competitiveness of AT&T's pricing for a $4 million voice and data contract. The results show that the contract prices are "good" in comparison to your firm's peers. All is well until you hire a telecom negotiating firm to get the carrier to lower its rates 25%, saving your company $1 million. You wonder how you could have been overcharged by $1 million yet still have your pricing considered "good" by a benchmarking firm.

Where did you go wrong?

When you got the $4 million contract, you probably did the best you could without dedicating your life to telecom negotiations and solving the mysteries of tariff filings. But that's like playing basketball one-on-one with Michael Jordan and expecting to win. Carriers crank out thousands of contracts per year.

The carriers word the tariffs so that very few companies - if any - qualify for the same rates given to another customer. If your company uses the same amount of telecom services or less, you have 30 days to request the same deal. The disadvantage is that many of the key terms and conditions are not outlined in the filed tariff, so it isn't clear what you're getting.

Understanding tariff filings is key to improving your company's deal. The way to get a better telecom pricing is to help the carrier cloak your tariff so other companies cannot take advantage of it.

The game plan

Here are some of the games AT&T, MCI WorldCom, Sprint and other carriers play to hide the best rates and protect their profit margin.

* Contract tariff number. The carrier hides the name of the customer and assigns each tariff an anonymous number. Carriers can file multiple tariffs for a customer, effectively hiding credits and letting the customer pick the best rates from several tariffs that also contain poor rates.

* Revision number and date. The carrier may hide the true terms of the tariff by overwriting the information on original pages with revised pages. Other key information can also disappear as one page gets overwritten.

* Contract term. One particular tariff may actually be a 36-month deal that was renegotiated and refiled year after year in order to look like a longer agreement. For example, a three-year deal could appear to be a nine-year deal that has poor pricing in years one through six, which have already passed for the intended customer. Competitive pricing would then appear for years seven through nine. The carrier has effectively poisoned the deal for other customers.

* Gross monthly usage charges. AT&T's tariffs are almost always stated as gross pricing before discounts and credits. Because these discounts are often in excess of 50%, the customer's tariff appears much larger at first glance. Sprint's and MCI WorldCom's commitments are almost always net unless specified up front. The advantage of gross is that as telecom prices decline, most carriers still keep raising their base rates. It's possible for a contract priced on net discounted rates to have a minimum annual commitment (MAC) shortfall because of subsequent industrywide price declines. A MAC is the minimum amount of dollars a customer agrees to spend with a carrier.

* Shortfall charge. Almost all tariff contracts have a shortfall penalty. In many cases, this penalty is 100% of the amount by which a customer fails to satisfy the MAC in any year of the tariff's term. Because most large companies receive 50% discounts, the penalty ends up being twice the amount the customer would have paid for the service, says Hank Levine, a partner of the Levine, Blaszak, Block and Boothby, a Washington, D.C., law firm. Also be aware that any rate adjustments you get during the middle of a contract could cause a shortfall, says Mike Bruesewitz, a tariff analyst with Telwares, a telecom procurement and negotiation services firm in Destin, Fla.

* Capped volume-sensitive discount tables. The carriers create volume-sensitive discount tables that limit discounts for usage above a certain amount. If companies exceed that volume, they must pay full tariff rates. Carriers claim they cap the discount at certain volume levels to discourage reselling, but the real reason they do it is to minimize your leverage.

* Monitoring conditions. The tariff's terms and conditions defining your usage patterns are meant to limit your flexibility, secure the carrier's margin and poison the deal for potential subscribers. AT&T may say, for example, that 80% of a customer's traffic must be interstate, or 90% must originate from dedicated facilities. If you can't fit the traffic mold, you can't buy under this tariff. Noncompliance with these conditions can create a substantial penalty based on your MAC.

* Uncertain events. "One practice of deception carriers use to offer pricing concessions is 'uncertain or future event' pricing," says Larry York, former pricing specialist for MCI WorldCom. In other words, the pricing in the contract is contingent upon an event that may or may not occur. For example, a carrier may offer an additional 5% discount if the customer has $100,000 per month of international usage. Only the customer and the carrier know for sure if the event in fact occurs.

* Exclusivity clause. Some carriers get customers with an exclusivity clause that basically limits your flexibility and volume leverage. For example, the carrier might stipulate that at least 80% - and sometimes even 100% - of your telecom expenses have to go to the carrier as long as the services aren't already under contract. This tactic locks in new revenue for the carrier. "Sprint in particular uses this clause in an insidious way via reference to the term 'preferred telecom provider,'" says Pete Wilson, president of Telwares. "The unsuspecting customer later finds out that this phrase commits him to 98% exclusivity with Sprint or else his company loses all discounts."

* Rate hikes. Base rates for software-defined network services have been steadily increasing an average of 5% to 10% per year. A carrier may give you good initial pricing, only to increase the rates later. The only way to prevent your rates from going up is to get stabilization language in the contract and tariff.

* Intrastate rates. The carriers all file intrastate rates with public utility commissions in individual states. By reading a tariff, all you can determine is the applicable intrastate discount, not the actual rates. The intrastate rates can increase without changing your tariff.

These games make it difficult for you to compare tariffs and determine whether your telecom deal is market competitive. However, you can hold your own in a negotiating match with carriers by maintaining leverage throughout the life of the contract. The trick is to know which terms to include in the contract and which conditions to avoid.

Key contract terms to embrace

* Rate review clause. Make sure you have the ability to lower your telecom rates if the actual market prices change. The best clauses compare your rates to all providers and not just those of your current carrier.

* Rate stabilization clause. This clause prevents your rates from increasing during the contract period. Carriers regularly increase their base rates even though after-discount rates have dropped considerably over the last decade.

* Service-level agreement penalties. If the carrier has problems delivering service, it must pay you an agreed-upon amount. This fiscal reality gives your carrier extra incentive to worry about service levels.

Other key clauses that should be in your contract include technology migration, carrier merger protection and material failure. Technology migration clauses let you move traffic from one technology to another without carrier penalties. Carrier merger protection safeguards you from problems caused by a merger, such as the MCI WorldCom deal. And the material failure clause gives the ability to terminate a contract if the carrier doesn't perform to a set standard.

Key contract terms to avoid

* Exclusivity clause. Don't agree to any exclusivity provisions or you give up future leverage.

* MAC ratchets. Carriers like to have the MAC as high as possible. They may compare your company's usage to a percentage of last year's usage or the previous MAC, whichever is higher. Again, all this does is limit your company's future leverage and carry the risk of shortfall because your commitment can go up but not down.

* Capped volume-sensitive discount tables. Corporate America is in an acquisition mania, so it becomes easy to have unexpected and sizable increases to your usage. Make sure acquisitions or rapid growth do not cause your company's rates to go up to full tariff prediscount pricing on the excess usage.

* High MACs. Many carriers try to have you commit to volumes too close to your current usage. This creates a high risk of future penalties.

Be in the know

Telecom carriers have been able to maintain such widely varying prices because few understand the telecom game well enough to defend against their ever-changing tactics. Here are some places to go for help:

* Benchmarking firms. Hire one of these companies, but understand clearly the limitations of the results they produce. Two of the top benchmarking firms are Gartner Group and META Group.

l Shop around. If the carrier doesn't believe it can win your business or your current carrier doesn't believe it could lose your business, the company won't produce an aggressive bid.

* Use a consultant. Have someone review your contract and carrier bids. Some companies charge for this assessment, others don't. Check the consultants' customer references to get a feel for their experience and their ability to improve rates, terms and conditions.

Telwares conducts telecom negotiation and procurement for Fortune 2000 companies. If you work for a large company that needs legal assistance with contract terms and conditions, consider Levine, Blaszak, Block & Boothby. Smaller companies should consider Lynx Technologies or Profitline.

Now that you know what carrier tricks to watch for, how to maintain leverage and where to go for help, you're better prepared to win a good telecom contract. Let the games begin.