Prices for telecom services have been falling for as long as any of us can remember. Price savings in return for contract renewals, or as part of mid-term contract benchmarking exercises, or as the result of a competitive procurement, have become the de facto expectation of IT and procurement departments. Success is often measured not by whether savings are achieved, but by whether the reductions meet a percentage savings target set by management.
Telecom service providers have generally been able to meet the expectation of year-on-year price reductions because their costs have continued to decline and price reductions have been offset (at least in part) by customers buying more bandwidth and new services. A good example of this is the substitution of corporate voice and data mobile services (where margins are high) for traditional landline voice services (where margins are low).
In this environment, there is a danger when you simply sit back and accept periodic moderate pricing reductions from your carriers (which appear to track general pricing trends in the market) without exerting too much effort or seeking to maximize and take advantage of negotiation leverage. Why rock the boat when your prices are going down and you are comfortable with the incumbent supplier(s)? Suspicions that your pricing is lagging the market are pushed to the back of your mind as you present the price improvements from the latest contract renewal to a receptive management.
New Temptations
The economic turmoil of the last year should have shaken the status quo. And in many ways it did--some companies have taken genuinely radical steps to reduce their telecom expenses, such as taking back corporate liable cell phones from their employees and canceling or downsizing services that they can live without .
But in terms of negotiating pricing improvements, in many cases the status quo ante has changed very little. The unprecedented pressure on IT managers to cut costs quickly led many to run to their old friends at the incumbent carriers and hold their cap out. After all, the telecom industry has suffered less than most in the downturn, so the carriers should be happy to repay years of loyalty by helping their customers meet cost reduction targets, right?
Not really. Those companies that have diligently reduced telecom expenses through demand management, or whose traffic has fallen as a direct result of a business downturn (reduced volumes of customer calls, site closures, employee layoffs, etc.) have often been met by carriers explaining that reducing their prices is going to be much harder than normal because their spend has fallen. Ouch.
Even those companies whose demand for telecom services has actually risen as an indirect result of the downturn (e.g. travel bans leading to more use of audio and video conferencing; ongoing efforts to replace headcount with technology) have not necessarily found their carriers to be flexible unless they have significant sticks or carrots to use. In the absence of such incentives, carriers are still willing to do deals that reduce their customers’ pricing, but only in return for concessions like a long term lock-in for the customer.
Despite all of the short-term focus and survival of the fittest thinking that has dominated 2009, telecom suppliers have been taking a remarkably strategic and long term view (which they can do because, as noted above, the telecom industry has not suffered as much as most others in the downturn). Responding to IT managers’ cost reduction targets, and the need to meet them as quickly as possible, carriers are offering existing customers new pricing, and often significant credits, in return for signing new contracts. But the new contracts are typically for much longer terms than is normal (3 years plus) and include financial commitments that are often much higher than those to which the market has become accustomed (80-90% as opposed to 50-60%). Other painful conditions are also appearing--pseudo exclusivity clauses, escalating spend thresholds to qualify for annual credits or specific prices (often charmingly referred to as "Revenue Stimulation Credits"), and the eradication of customer-friendly contract terms such as annual rate reviews. In essence, carriers are taking the view that short term pricing concessions make strategic sense if in return they can secure lengthy contracts that lock in customers on terms that are highly advantageous to the carriers.
Immediate pricing concessions, and signing bonuses, are extremely attractive to a customer that is fighting for survival. Accepting onerous conditions may not seem like a big price to pay, particularly when it is difficult to even start thinking about 2010 (and the new cost reduction targets that will come with the New Year). But the long term damage of such deals is substantial, and you’ll be hampered by them for many years to come. High percentage spend commitments and other spend thresholds significantly reduce your leverage in future negotiations and will make it much more difficult to move to alternative carriers and services even when that will clearly be in the best interest of the company.
Dr Jekyll and Mr Hyde in 2009
That said, telecom suppliers are exhibiting a bit of Dr. Jekyll and Mr. Hyde at the moment. Customers who are forced (or choose) to negotiate only with their incumbent supplier are facing Mr Hyde across the negotiating table, with all of the lock-in tactics described above. But those customers who are conducting supplier negotiations with genuine leverage (i.e. where the customer is soliciting competitive offers and is seen as prepared to move business if the incumbent supplier does not provide a competitive offer) get to face Dr Jekyll across the table, and although he starts with the same bag of tricks, they quickly disappear in the face of hunger for your business.
Some would say that the schizophrenia is nothing new. They are right, but in the last 12 months the difference in treatment has been far more pronounced than ever before. First, many customers are more susceptible than they used to be to the temptations offered by the carriers, and the carriers are aggressively taking advantage of that to lock in customers in return for short-term price concessions. Second, ever since the "mega mergers" created the current incarnations of Verizon and AT&T, the two behemoths have been fighting tooth and nail for new business and to win business from each other. But such competition only happens when the customer initiates a truly competitive process, and in 2009 the competitive process is often sacrificed in the rush to realize savings as quickly as possible.
Networx
One of the challenges facing the savvy telecom manager who does not want to accept the carrier offer of 10% price reductions in return for an 90% commitment and a three year extension added on to the end of a contract that still has 18 months to run, is how to justify to management that 10% simply isn’t good enough. There is very little information in the public domain any more that can be used to benchmark a deal, and thus companies often turn to consultants for telecom pricing benchmarks. The only major public domain source of competitively negotiated telecom pricing is the Networx pricer, but, as you will see, it must be used with caution and should be labeled with a serious health warning.
Networx, administered by the GSA, is the set of contract pricing and terms, spanning multiple telecoms suppliers as well as a range of other IT services, that is available to government agencies and to designated "mixed-ownership government corporations." Networx prices are in the public domain and accessible at https://releasedprices.networx.gov/unit/. The portal is not particularly user friendly, and doesn't necessarily use industry standard telecom terminology, which can make it difficult to understand what is being looked at, but once you get past those issues some of the pricing that can be gleaned from the portal is mind blowing, including dedicated to switched calling rates from AT&T that are below a penny a minute and T1 access prices that are far below what’s offered to corporate customers. But there are also some rates that are not competitive with the market, such as the AT&T Networx rate for toll-free reservationless audio conferencing at $0.0194 a minute--significantly above market for large companies. Thus the health warning mentioned above is two-fold: (a) the really good rates are essentially unachievable if your purchasing power is not as big as the US government's (which means all of you...); and (b) some of the rates are actually not very good. That said, in certain areas, Networx pricing provides food for thought and shows key price points at the bleeding edge of the market.
So What's Next?
The fact of the matter is that competitive procurement processes, where there is a real and tangible threat that your incumbent supplier (or suppliers) will lose business, are the only way to get the best possible deal. And the incumbent losing business does not have to mean shifting all of your complex network services to an alternative provider--moving 10-20% of your services to a non-incumbent gives a massive shot in the arm to your credibility as a customer that is willing to migrate services to realize business benefits, and fires a warning shot to incumbent suppliers that if they do not cooperate and provide market leading pricing they risk losing business.
Competitive procurements are the front lines of the telecom marketplace--the only procurement vehicles capable of moving the market forward and driving pricing, service levels and contract terms to new lows and highs (as applicable). When working on competitive procurements, our firm (TC2) is continually presented with responses to Requests to Proposals and supplier offers that include new price points, even on smaller deals. That never happens during sole source negotiations with an incumbent supplier, no matter how big the deal.
In particular, over the last 24 months, Managed Services deals (which include maintenance and management of networks and network equipment) have been playing a major role in driving the market and delivering bleeding edge pricing proposals (see our blog post, Juicy-transport-pricing-found-in-managed-services-procurements). Carriers are aggressively pursuing managed services business because margins are higher than traditional transport services and because the carriers are eager to move up the value chain and provide services that penetrate further into their customers’ premises. The carriers are therefore willing to heavily discount voice and data network transport pricing in return for new managed services business.
The Challenge
Your challenge, in what remains of 2009 and into 2010, is to resist the temptations that your incumbent carriers will offer that may meet your short term savings needs but will cost you multiples of the savings delivered in the future, and instead to leverage the cost saving pressures you are under, so as to change the status quo, whether with incumbent supplier(s) or by moving business to a new provider who is offering a market leading deal. In 2009, many of the traditional barriers to moving service are being overcome by the pressure to reduce costs--it is no longer acceptable for the engineering department to insist on using an incumbent supplier principally because that is the devil they know and love when this involves rejecting cost reductions from other suppliers. Your incumbent may appear to be arrogant and inflexible, but it is also increasingly anxious that cost pressures will cause you to look elsewhere if they do not cooperate. Your challenge is to find and exploit that insecurity--but to do so you will need to inject competition into your relationship.
Ben Fox is a Managing Director of TechCaliber Consulting, LLC (TC2), a global technology and telecom consultancy that advises the world’s largest companies on strategies for reducing their costs for telecom and technology products and services. Ben can be reached at [email protected].
