Challenging times for telecom deals

You need strong leverage to successfully negotiate a favorable contract with carriers.

Network executives have come to expect double-digit annual price declines for voice and data services, but that's no longer realistic in today's volatile market. Negotiating a world-class contract is a lot more difficult in this era.

Virtually all carriers are struggling with financial issues of varying degree, while the downturn has simultaneously increased the pressure on enterprise customers to cut costs. As these opposing forces square off, the only way to win the best prices is to have leverage now and throughout the term of your contract.

Telecom negotiation points to ponder
Keys to the telecom procurement process

Market madness

It has been a buyer's market for telecom service since the Telecommunications Act of 1996. Unparalleled access to venture funds and IPO capital spawned a host of new local and long-distance providers. Fierce competition and oversupply gave IT executives the upper hand in contract negotiations.

But then the tech sector crashed, and the carriers began to crumble. The WorldCom debacle is just the latest in a long line of telecom bankruptcies, including Global Crossing, McLeod USA, PSINet, Winstar and XO Communications. Qwest may be the next to follow.

WorldCom's bankruptcy has caused AT&T and Sprint to tighten their purse strings and shift focus away from price and onto financial stability. AT&T's new tagline, "Yesterday, today, tomorrow" conveys that message. Sprint has been the best opportunist, selectively stepping in to offer aggressive prices and perhaps a more stable choice.

If you lack contract leverage, AT&T, Sprint and WorldCom have become more difficult to negotiate with. Carriers have been reluctant to improve pricing or change limiting terms and conditions.

Good contract leverage comes from having uncommitted traffic, increased voice or data usage, an annual review clause that lowers your future commitments, or from a contract that expires within 18 months. Poor contract leverage comes from having overcommitted traffic, decreased usage, or a contract that you recently signed or one that is more than two years from expiring.

But if you hold the cards, custom negotiated rates on legacy services are still being reduced, albeit at a slower rate. But customers have more of a burden to prove that a rate reduction is warranted. This proof becomes very tricky in today's environment. Compounding the challenge is the Federal Communication Commission's "detariffing" edict, which lets carriers provide some of their rate information on their Web sites or directly to consumers rather than filing tariffs with the FCC.

Given the uncertainty of the environment, protect yourself by insisting on the following key contract clauses:

Stabilized prices: Great pricing is still possible, but don't expect to plow new ground with rate levels. A Fortune 100 company recently reduced its on-to-off rates for switching between the local and long-haul portion of the network to less than $.025 per minute, and its T-1 rates to about $200 per month. The trick, of course, is knowing what constitutes best-in-class pricing in your environment and locking rates down. Otherwise, carriers will continue to raise list prices and surcharges at every opportunity.

Solid service-level agreements: Service levels continue to deteriorate as carriers reorganize and downsize. Cutbacks reduce your support level and problem response times, and increase the amount of time it takes to transition to new technology. Specify these service levels in your SLA, along with remedies for noncompliance.

Specific billing protections: Carriers have made the process of correcting bills and collecting overpayments next to impossible. The best protection is to perform audits regularly yet also retain contract leverage through myriad billing disputes, back-billing limitations and bill payment-related contract clauses.

Technology migration protection: With adoption of VPNs increasing, make sure you have technology change protection in your contract. Essentially, such a clause lets you reduce your commitment and move affected services to a new technology without penalty if the migration lowers your spending.

Sometimes the carrier will ask for right of first refusal to supply the new technology and if you agree to this, the contract must also contain a price competitiveness clause to ensure rates meet the market standards. Another condition to seek is that if the carrier can't migrate you to a new service within a given time frame, you're free to go elsewhere.

Carrier bankruptcy protection: Make sure your contract lets you move penalty-free to another provider if your carrier files for bankruptcy. Unfortunately there might not be enough time to provision services to another carrier, as some customers of part of KPNQwest's network found. Consider using multiple carriers to give yourself a fallback option. Equant and Infonet are offering special pricing for redundant networks you can access if your carrier is forced to stop operations.

But to keep a multiple-carrier environment a viable option, don't overcommit your contract volumes. Carriers have been reaching to the sky in establishing commitments using past standards that are no longer appropriate.

Challenging times for telecom deals

Market madness

Related Links