Smart contracts make smooth flights

Just as take-offs and landings are the riskiest parts of flying, the beginning and end are the riskiest parts of a network service agreement. Fortunately, there are ways to avoid some of the most common problems.

In the take-off phase, falling short of minimum volume commitments is probably the biggest risk facing a company that signs a multi-year network service agreement. Failure to generate adequate traffic volume quickly can make it nearly impossible to catch up later.

Transitioning to a new vendor can be complex and slow. Installation delays can result in lower-than-anticipated volumes, which can translate into shortfalls. Customers need a transition plan just as pilots need a flight plan. Requiring your vendor to generate such a plan will help you avoid shortfalls.

Another useful transition tool is a ramp-up period. It can run for three months to a year, depending on the complexity of the situation. During this phase, there are no volume commitments, which lets the customer’s spending grow to appropriate levels before the commitment applies. You don’t want too long a transition period, because in effect that extends your contract.

Sometimes customers overload the plane by negotiating commitments they cannot realistically meet. This happens when a customer negotiates reduced pricing but neglects to reduce the volume commitment. If a company that barely meets an annual commitment of $1 million negotiates a 15% price reduction, it must reduce the commitment to $850,000 or risk shortfall.

The end of a contract is even riskier than the beginning for customers, because there is less time to correct problems. Moreover, relations between customer and carrier can be tense, and goodwill lacking. Negotiate exit terms into your contract. You pack your parachute before you leave the ground, not when you hit turbulence.

Even the most sophisticated customers sometimes face shortfalls at the end of their contracts. A work-off provision can help by, in effect, extending the agreement for a few months. Such a provision can reduce or even eliminate a shortfall while benefiting both parties: The carrier gets its revenue, while the customer gets service in exchange for its money and avoids writing shortfall checks for nothing in return.

Some carrier contracts have evergreen clauses that cause them to renew automatically if they are not canceled. Month-to-month renewals are fine, even desirable, but an automatic one- or even three-year renewal at stale, above-market rates is a telecom manager’s nightmare. Such clauses can be eliminated during initial negotiations.

The telecom equivalent of running out of runway is failing to migrate services before an agreement expires. After that, base (or tariff) rates generally apply, and they can be several times the contract rates they replace. The easiest way to extend the runway is to negotiate a migration clause, which permits customers to keep taking services at contract prices for three to six months without additional commitment.

A customer that negotiates solid contract provisions, makes reasonable commitments and plans its migration can expect a pleasant and uneventful flight.

Castillo is a partner with Levine, Blaszak, Block & Boothby, a law firm that specializes in negotiating telecom and technology agreements for enterprise customers. He can be reached at jcastillo@lb3law.com.