A recession-era guide to network service agreements

How to save money in the event of a downturn, merger, divestiture or reorganization

If your company is going through a downsizing, merger, acquisition, or even bankruptcy, there are steps you can take to retool your network service agreements and save your company money. Here are some tips.

Not many enterprises have been lucky enough to escape the effects of the current economic downturn.

If your company is going through a downsizing, merger, acquisition, or even bankruptcy, there are steps you can take to retool your network service agreements and save your company money. These tips are offered by Levine, Blaszak & Boothby, LLP, a law firm specializing in network service and IT procurements. (See a related story on how you can benefit from bankruptcy law.)

Step 1: Assess your rights and obligations

The first thing to do is review existing contracts. If you were not able to begin that during the due diligence phase of a merger, acquisition or restructuring, it should be an early priority after closing. The key is that before sitting down to negotiate with service providers you need to know what services you have to work with, what commitments have been made, and the terms that prevent or inhibit contract termination or renegotiation.

Many enterprises do not look before leaping to cut deals post-transaction or in the face of economic troubles. The excitement, disruption, confusion and anxiety that often accompany a merger, acquisition or restructuring make it easy to succumb to the temptation to rubber stamp or roll over service arrangements quickly and move on to the details of consolidation.

That temptation is heightened as vendors offer one-time credits or other short-term benefits to maintain or expand their role in the new environment, operations personnel press for reductions in the number of contracts and service providers they have to deal with, and management makes realization of expected savings right now a strategic priority.

Here are some issues to consider and terms to look for in reviewing service arrangements.

• Identify which services are provided by which service providers under which agreements. Distinguish between custom arrangements and commoditized services. You have more options for basic/undifferentiated services – transport and equipment maintenance, for example – and it may be easier to identify and terminate redundant service arrangements in those areas. Conversely, you may have little choice but to maintain customized environments in the short/medium run.

• Once you know what you are getting and who you are getting it from, zero in on redundancies in contracts and service providers. In a merger, if you have inherited two Cisco maintenance arrangements, you should be able to consolidate them. If you have inherited a Verizon MPLS network and an AT&T MPLS network you are half way to an enterprise-wide dual network, or you need to migrate to a single backbone (which can be awkward, disruptive, and very expensive if not done carefully).

• Identify unsatisfied financial commitments and associated termination charges. Some of these are agreement-wide, but in recent years carriers have made a concerted effort to lock in their customers by making commitments, and the concomitant early termination charges, site-by-site, circuit-by-circuit, or device-by-device. These terms, if applicable, will define the costs and limitations of unilateral action under your existing arrangements.

• Identify terms that mitigate exposure to financial commitments for events such as divestitures and business downturns. This is the flip side of the preceding point. Such clauses may provide direct relief from commitments or at least provide some leverage to mitigate their effect. But know that the providers' versions of these terms (if that's what you have) are often worthless – they basically give you no more than the right to request a conversation.

• Do your volume-related pricing terms promise realizable benefits or costs if service volumes rise or fall? Do not assume that you will be able to reduce unit costs by migrating additional services to an existing agreement. Particularly in the managed services area, vendors like to keep open their options to re-price for "scope changes". Identifying where you can migrate additional service at will and where you have to haggle will help you prioritize renegotiation tasks before you go to the providers.

• Does your contract include rights to consolidate acquired agreements under it or vice versa? As discussed below, these clauses can serve as a guide or even a catalyst to renegotiation of multiple contracts with a vendor to a single service arrangement.

• What is the remaining term in a service arrangement and do you have any transition/migration rights under it? If a key service arrangement is expiring, you may need to negotiate a short-term extension. If the arrangement is redundant or one you would want to terminate anyway, a limited remaining term may eliminate the need to do anything. Either way, you want to know each contract's status so you can plan and prioritize contracting and re-sourcing tasks.

• Identify terms that allow you to compel refresh or review of rates and other key terms. Rate review and benchmarking clauses, and terms that allow the business to test the market for new services or increased volumes, may provide additional leverage following a merger, acquisition or consolidation.

• Identify ongoing procurements, renegotiations, rate reviews and other initiatives that were begun before the changes in your company. You may want to continue some of these, but it's more likely you will want to suspend, if not terminate, them. The last thing you want to deal with in reshaping the network and IT service environments are projects that either do not reflect the new environment or create impediments to consolidation and re-sourcing.

• Don't forget the details. Consider the need to reassign toll free numbers, assign software and related licenses, and continue offering service to divested business.

The point is that you need to know, and document, relevant contractual rights, opportunities and obligations before engaging in negotiations that will use and affect them. Examining the contract terms is the only way to avoid erroneous assumptions or relying on vendor representations of what those terms are.

You will want to undertake the assessment with minimal vendor input. All you want from the vendors is confirmation that you have current versions of all of the documents.

Step 2: Keep the lights on

Avoid making long-term commitments based on short-term needs. However great the temptation to lock in quick savings or check off one of the many issues on your to-do list, resist long-term solutions until you determine which technology and service arrangements to retain, terminate and renegotiate.

If you are faced with the expiration of an essential service arrangement, take action to extend it for an appropriate period – one year, not three or five. Depending on backend transition and migration rights, a year is a good benchmark for network service deals, though you may need more time for complex managed service and outsourcing arrangements. The better your transition clause (detailing rights to keep the contract terms and prices in place without volume commitments while you move your business after the contract expires), the less likely that you will need a substantial extension.

If you need quick savings in the near term, pare back on locations and eliminate duplicate facilities. 'Merger synergies' may be overrated, but in the IT and network areas they are real; it's highly unlikely that you will need as many data or call centers after a merger/reorganization as the entity or entities had before.

Step 3: Prepare the new environment

Once you have done the homework and gotten breathing space against contract expiration, you are ready to remake the service environment. Here are some tips.

First, explore consolidation. When a restructuring results in two or more agreements with the same vendor, which is the rule rather than the exception in the network services world, you should be able to consolidate those arrangements under a single master agreement. This will simplify the relationship by creating a single set of terms and consolidating account support. It also provides an opportunity to consolidate and reduce aggregate contractual commitments. And the customer can almost always maintain -- and usually improve – its pricing and terms.

Service providers usually cooperate in this type of consolidation, though they will try to extract concessions based on their perceived leverage. An acquired agreements clause can help, if you have one. Such clauses take many forms, but all involve an agreement by the service provider to consolidate the subject agreement with other agreements the service provider has with entities the customer merges with or acquires.

The clauses usually do not expressly call for reductions in the resulting aggregate commitment – you'll have to rely on other terms (or negotiations) to get that result. At worst, an acquired agreements clause can compel the service provider to come to the negotiating table. At best, it "pre-resolves" some key issues and makes it easy to come to agreement quickly on reasonable terms.

When a restructuring results in like services being provided by two or more competing vendors -- also common in the network services world -- the customer usually has even more leverage to renegotiate existing arrangements or solicit new ones than in the one-vendor situation. That may seem counterintuitive, especially if the customer will be unable to meet its combined pre-event commitments. But however anxious you may be in this situation, the vendors' problems are worse. Each fears it will end up the net loser, ill-positioned to regain business in the future.

The key to successful negotiation in a two-vendor world is maintaining competition between the vendors. If you down-select prematurely, or if it becomes evident that you are using one provider merely to extract concessions from the other, you will lose your leverage before you lock in the benefits of competition.

Anticipate and deal with management involvement/favoritism. If you are not a 'CXO' or the head of procurement, those above you will be charmed, cajoled and/or arm-twisted despite vendor protestations to the contrary. And in merger situations, the post-restructuring managers usually favor the vendors that came from their pre-merger company, even if they are less responsive or offer less favorable terms. Management may well back you up, but you can't count on that without some advance planning.

Regardless of your situation, keep some basic points in mind in restructuring a service arrangement. First, remember that in the wake of a merger or reorganization 1 plus 1 seldom equals 2, at least in terms of network and IT needs. Data center, call center, office and personnel reductions will reduce aggregate demand and spend, and thus vendor revenues. Service providers will not take this into account when proposing commitments or discount tiers. It will be up to you to ensure that volume-driven terms reflect the realities of consolidation.

Second, do not pay too much for marginal price reductions, contract consolidation or a changed scope of service. Vendors always ask for new financial commitments, longer service obligations or other substantive concessions when renegotiating agreements, but they rarely insist on them, and your job is to consider whether the costs commensurate with the offered benefits. If the additional costs are relatively small (six more months on a term that is at two years or a commitment of 65% rather than 60% of potential run rate) and the benefits are substantial (10% off of recently negotiated pricing) they may be worth considering.

But if the service provider is asking for a substantially higher commitment as a percentage of expected requirements to extend a deal that is scheduled to expire in a year, you are going to be better off testing the market. Be especially wary of up-front "signing" or "loyalty" bonuses. Your CFO will want these, but in our experience the price is steep – about $3 demanded in additional committed service revenue/spend over the life of a contract for every dollar given up front.

When consolidation or downsizing result in a commitment shortfall or higher costs, the desire to trade short-term relief for longer or more exclusive commitments can be particularly great. In most cases, you will be better off rejecting the vendor's opening offer in favor of getting to, and keeping your options in, the next procurement cycle. If you are willing to call the vendor's bluff and demand reasonable terms for continued business, you will likely be able to negotiate avoidance of, or relief from, shortfall charges without trading away future options.

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