It is always a good idea to manage your communication carrier contracts to avoid any financial surprises potentially lurking in the fine print of your contracts. This is particularly true when your organization is transitioning to a new network technology. Consider the following examples:
In any of these scenarios, it is prudent to pay attention to the following aspects of your contracts with your communications service providers (carriers).
Technology Clause
Write clear, concise technology clauses that address the removal or minimization of contractual spending commitments when you transition to new technology, whether or not the replacement services are with your incumbent provider. Ideally, the specific types of technology change anticipated can be spelled out as “for examples” so that there is less left open to interpretation once the changes are taking place. In one case, we provided one carrier with a list of MPLS locations and the planned date to disconnect the circuit at each location. This will be an addendum to the renewed contract.
If the language is not clear, as is the case with many technology clauses, it will be less likely to accomplish your objective of avoiding financial liability.
Contract Length
Keep your contract lengths short whether you’re in the middle of your transition or just anticipating one. It is unlikely that your cost of service will increase dramatically for a shorter contract. A one- to two-year contract length retains the most flexibility and frees you from the worry of meeting longer-term spending commitments. If your contracts expire, most providers will continue the services at current rates, sometimes indefinitely. While you need to monitor this to be sure the rates do not increase, having services at previous contract rates without accompanying spending obligations may be a good option.
Contract Expiration Dates
Ensure that all your contracts expire on the same date. This makes them easier to manage, since you do not have to keep track of multiple contract expirations and their corresponding spending commitments. If you sign a new contract or renew an existing one, simply ask your service provider if it can expire on the date you prefer – one that synchronizes with your other contracts. The provider will not typically offer this option, but they may accommodate your request.
Spend Commitments
Only commit to spending goals you believe are realistic. Most communications service provider contracts include a commitment to spend a certain amount during the life of the contract, with accompanying penalties if you have a “shortfall” and do not meet the commitment. When you sign a contract, make sure that the commitment is realistic based upon what you will be spending and whether you will be sustaining that level of spend (or reducing it). Not all charges contribute to the commitment, so be clear on what is “contributory” and what is not. One example is taxes and surcharges. They may account for 20% of your expense but will not be counted toward the total commitment. While a good technology clause may provide flexibility with your spending commitment, other things can happen to reduce your spend – i.e., closing sites or business downturn. Those possibilities should be considered as well and perhaps written into separate clauses. Finally, although most providers require an annual spend commitment you may want to ask for a commitment that covers the entire term of the contract instead. This will provide greater flexibility if spending varies considerably from one year to the next.
Early Termination Liabilities
Minimize your exposure to termination penalties. There may be potential charges for not meeting spending commitments. Additionally, you may be penalized for terminating a single circuit under a contract. If you have agreed to keep a circuit for two years and find you no longer need it after one year, you may be obligated to pay the full cost for the second year as an early termination penalty. Negotiate this penalty. While it is not likely this penalty can be eliminated, it may be possible to negotiate for a penalty of 25% of the remaining contractual cost of the service. In many cases, your service provider has signed an agreement with a second service provider enabling them to deliver the circuit, so if you disconnect before the end of the agreement, your provider may be on the hook to pay the other provider for the service.
Attainment Credits
It may pay to delay. Many communications contracts provide substantial credits once you meet your spending commitments, so this needs to be considered as well when looking at the overall financial picture of transitioning. If a delay in your transition will result in receiving your attainment credit you may want to consider the delay.
Monitoring and reporting by the carrier
Ask your communications service provider to assist in monitoring your spend and the items mentioned above. Meet with them at least quarterly during a network technology transition to ensure you are minimizing your financial liabilities. If you are moving away from your incumbent provider, they will likely be less enthusiastic about helping you to manage the transition and any financial implications.
Jane is writing on behalf of the SCTC , a premier professional organization for independent consultants. SCTC consultant members are leaders in the industry, able to provide best of breed professional services in a wide array of technologies. Every consultant member commits annually to a strict Code of Ethics, ensuring they work for the client benefit only and do not receive financial compensation from vendors and service providers.
