Yesterday the Governor of the budget-challenged California ordered a massive cutback in cellphone use by State employees (see http://gov.ca.gov/news.php?id=16875). By so doing, he hopes to save the state $20M/year. It's a worthy goal, but it's also one the Governor will probably find easier to say than do. Most cellular contracts contain some important terms and conditions designed to protect the cellular carrier from precisely the types of rapid cuts Governor Brown envisions. These include:
1. Term agreements. In order to obtain favorable prices on corporate liable contracts (billed to the organization vs. individual employees), customers, including state governments, agree to term commitments--typically one or two years in length.
2. Device commitments. For the term, the customer commits to using a minimum number of mobile devices. In the case of a state government the size of California, this could easily run into many thousands of devices.
3. Revenue commitments. To obtain the best price/user, the customer commits to supplying the mobile carrier with a minimum of $X/month for each and every month of the term.
4. Shortfalls. To obtain the best price, the customer often agrees to pay the carrier the minimum revenue commitment even if the device count or actual usage is less than the contracted amount. If a particular device and service is discontinued prematurely, the customer may also have to pay an early termination fee.
5. Effective term length. A customer may sign an agreement that expires on 24 months from now, but not all employees' contracts will expire on that date. In fact, most won't, because the commencement date on each device is the date of its activation. For example, the contract expiration date of a cellphone assigned to an employee 6 months from now is not 24 months from now, but 24+6 (30) months from now.
Going forward, the Govenor can elect to disallow mobile devices for some new employees, but that really doesn't help with the current problem. After all, the state isn't hiring many people these days. Unless/until the State looks at its current contract(s), it can set cost-cutting objectives. But it may not be able to attain them absent renegotiating many of the terms I have described here.
Here's a recent example--one company I worked with just 3 months ago had fallen on very hard times, and it furloughed a large percent of employees. As a result, it wanted to discontinue service on over 4,000 mobile handsets. Without a sympathetic carrier that ultimately was willing to re-negotiate, the customer's effective going-forward per-employee mobile expense could have gone sky-high. The company wasn’t able to fulfill its original contracted obligations, but we successfully renegotiated terms of the agreement. However, since its volume commitment to the carrier was considerably reduced, the proposed new MRC (minimum revenue commitment) and devices prices were at a substantially higher rate. It was either that, or a substantially elongated contract term. Compared to doing nothing, the customer certainly saved considerable expense. But it didn't save the kind of money a CEO or CFO might expect. That wasn't feasible.
So, Govenor Brown, sharpen your pencil. You have some more number-crunching to do. Lisa Pierce is President, Strategic Networks Group consultancy.
