How much does it cost a sales rep to call from your headquarters to a client across town? Or across the Pacific? How much does it cost to send an e-mail from a branch office to the IT department? If you’re like most IT executives, whatever rate you’re paying for telephone lines–from voice to T1 data lines–has been negotiated and even bid out competitively. Does this mean that you’re paying the lowest prices possible?
Telecom service, due to rapidly evolving market conditions, is dropping in price at the staggering rate of about 2% per month. But if you track what corporate telecom purchasers actually spend on telecom service with the Big Three carriers (AT&T, MCI, and Sprint), it’s clear that a company spending tens of millions of dollars on long-term telecom services could be saving millions. What’s holding companies back from taking full advantage of market forces is the style in which most companies have historically negotiated and contracted for these services.
Most executives follow one of three routes in negotiating telecommunication rates: passive, periodic, or proactive.
Choosing the best approach
Passive negotiators bet on multiyear agreements, generally with a single carrier. The shortcoming with this style is that your initial discount is lost as the market pushes prices down while your contract remains in force.
Periodic negotiators tend to negotiate one year at a time to take advantage of market conditions and of any increases in telephone and data traffic their companies generate. At Compass, our consultants studied 250 corporate sites over the past two years and found that well over 90% of all companies are periodic negotiators. While periodic negotiators often get progressively better rates with each renegotiation, we find that they do not get the best rates.
Proactive negotiators “cherrypick” from among many carriers. However, these negotiators are careful to consolidate their providers by service in order to capture economies of scale. As the chart below indicates, having just one provider for a specific service, such as outbound intrastate calls, is more cost-effective than using multiple providers for the same type of service. A typical large company with a $15 million annual long-distance expenditure can save as much as 35% by consolidating telecommunications service providers by type of service.
So why are proactive negotiators in such a minority–representing less than 5% of all telecom service customers? Many companies have interdependent relationships with their telecom providers, meaning that they may be both a supplier and a customer to one another. Or they may have a more complex relationship. Take the example of hotel chains, which allow telecom providers to generate revenue from in-room connections. Even more common, most companies just don’t have the personnel or the technology to monitor hundreds of service providers on a daily basis and ferret out the best price.
The best approach in today’s rapidly deregulating market is a combination of negotiating styles employed by executives who are armed with some important facts. First, they should understand what their current “effective” rate is. The effective rate is the contracted rate minus any bonuses, discounts, credits, or other incentives given by the carrier. At the end of a year, it is what you paid out minus what you received as an incentive from the supplier. A large global company averages 550 contracted rates.
Know your rates
Once you know the effective rate, you can keep departments and divisions on their toes when the telecom provider comes at them in a reverse cherry-picking maneuver. This reverse cherry picking happens after the corporation negotiates the best possible effective rate. This rate applies across the board so that the company saves overall on telecom services, although some departments pay more than they would have to pay if they negotiated their own contracts. Today, many corporations allow local divisions to negotiate their own deals. But if a division pulls out from corporate and cuts its own telecom deal, the corporate effective rate could go up. A savings for a department could become a loss for the whole company.
Second, a successful negotiator should be informed about future rates. What will increased competition do to rates for various carriers? Where will the discounts come from? Analyzing rates charged by a wide variety of providers will keep you current on market trends. Consultancies can also provide analysis.
To take advantage of the effective rate and future trends, a negotiator must adopt the proactive style at some point. You might cut some long-term deals for specific purposes, but if the driving issue is price, then proactive is the way to go.
Negotiators should play the Big Three against one another. You can gain additional leverage by bringing smaller providers to the table. You can garner substantial savings by simply sticking to your guns. There’s a limit to what bargaining can get, but it pays to hang tough and take time.
Next, watch the local access charges. In the next five years, Compass predicts significant decreases in access charges, varying by state, usage patterns, and other factors. Where you buy services will be just as significant as when. The future direction of access charges should be included in any contract you negotiate. Therefore, if you lease T1 lines, changes in leased-line access should be taken into account.
Strike while the iron is hot
Watch the market from quarter to quarter. If a carrier is having a tough quarter, it’s time to strike. Seek a short-term contract that locks in costs by traffic volume. Faced with having to accept 1 million minutes to one location area at a very low price or losing the revenue altogether, a phone company will acquiesce at the end of a difficult quarter.
As your old contract terminates, make sure you sign and write new contracts that take advantage of this dynamic market. Make the carrier remove restrictive clauses. Just agree to a dollar figure with your internal controller, without pegging what you spend to a particular service. This gives you the opportunity to split your telecom budget among many carriers but decide for yourself how to spend the dollars during the contract period.
Staying on top of telecom costs has always been profitable. But as the competitive environment increases, following these simple rules may save your company millions of dollars a year. //
Nicholas Wray is a telecom market analyst with Compass, a Reston, Va.-based consultancy that specializes in information technology operational efficiency. Visit the Compass Web site at http://www.compass-analysis.com.