Keys to the telecom procurement process

These are unprecedented times in the telecom industry. It's becoming more difficult to negotiate with carriers unless you maintain leverage (see main article, "Telecom tug of war"). Going forward, experts say the following trends may affect your company's voice and data services:

Pricing: Pete Wilson, CEO of Telwares Communications, suggests the long-term future of carrier pricing might be service-level dependent. With thinning staffs and a segment of the market still demanding best-of-class pricing, the carriers may dust off failed experiments of the past. "Carriers have always tried to sell value-added services yet never had pricing schemes that took hold," Wilson says. "Given an industry at a crossroads, I expect in the future to see bi-furcated price and service levels, just like one might find between coach and first class on the airlines."

Many see the future of the long-distance carriers residing in the regional Baby Bells. If the regional Bell operating companies end up consolidating the industry, we might see a regional pricing strategy replace the dog-eat-dog competition we have seen of the past 10 years. In this scenario, SBC dominates its territory but doesn't aggressively market to enterprises based in, say, Verizon's territory.

New technology adoption: Deployment of new technologies such as IP VPNs and Multi-protocol Label Switching (MPLS) will accelerate quickly. With the prices of legacy services stabilizing, enterprises will now look for technology changes more earnestly than they have in the past.

Carriers need to work on pricing IP VPN services competitively with legacy services such as frame relay. Right now IP VPN prices aren't lower than the leading edge for frame relay on a pure replacement analysis or directly comparing the cost of each service without factoring in other benefits. It may make sense to increase your initial spending to take advantage of a new technology that has the potential to reduce long-term costs or increase functionality.

The only way IP VPNs win, says Greg Hopkins, former head of Offer Development & Negotiations for AT&T, is to measure and calculate efficiencies that are gleaned in applications, quality of service (QoS) and productivity enhancements. However, methods for measuring and calculating the efficiencies for new technologies are falling short.

As new technologies such as MPLS and QoS achieve higher adoption rates, carriers are likely to reduce prices for legacy services such as frame relay, ATM, switched voice (especially international) and private lines to dissuade or delay migration.

New carrier strategies: Carriers are facing what amounts to a double-edged sword. They are very concerned with their own financial health and are reluctant to reduce pricing levels further. Yet carriers cannot afford to lose revenue streams from existing customers.

Service providers continue to walk a fine line between being aggressive in winning new business while keeping their existing enterprise customer base from eroding. Better to keep 80% of a revenue stream by writing it down, than lose 100% of it to a competitor. This has been the immutable logic over the past five years. The big question is whether the carriers will change their logic and back that up with market share losses. "Until carriers abandon their zeal for market share growth, there will always be pressure on carrier prices," Wilson says. Until this happens, the dynamics of pricing are unlikely to change.

Some carriers are in a better financial position than others and will use that leverage in their negotiations with clients. The competitive-bid process will still yield the best outcomes and provide most enterprise customers with the best opportunity to negotiate attractive deals.

Despite the uncertainty surrounding the telecom sector, there will be a number of viable providers, and competition will continue to be a driving factor in the market.

Back to main feature: "Challenging times for telecom deals"

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