Contract negotiation

Businesses that do not diligently manage their telecom expenses always pay too much. Telephone companies make a lot of money from customers who do not proactively manage their phone expenses. The customer audits his bills, fine-tunes his telephone accounts, and takes action to reduce his costs. This post will offers proactive cost management strategies for dealing with telecom contracts. Negotiating a new contract is the single most significant way for a business to cut its telecom costs.

The basic elements of a telecom contract and the most common special clauses that may be in a contract, then offers advice on how to negotiate a favorable contract with a telecom carrier. The information applies to all types of telecom contracts, including local service, long-distance, data, and wireless service.

The three phases of procuring telecom services are represented by the following documents:

The proposal;

The contract;

The phone bill.

The carrier first gives a proposal for services. A contract is signed. Then, a month later, the customer receives his first phone bill. To avoid being overcharged, the customer must give careful attention to each of these three phases. Only then can a business stay in control of its expenses. Phone companies are normally not out to deceive their customers, but their complex bureaucratic processes frequently put the customer in an unfavorable position. Telecom contract negotiation has many pitfalls that open up a business to undue financial risk.

Every customer’s situation is unique. Service offerings and contracts vary from carrier to carrier. But some things remain consistent, and this will explain the contracts and tactics most frequently used in today’s marketplace.

Paging billing cycles

Paging customers can choose to pay their bills monthly, quarterly, semiannually, or annually. Carriers offer price breaks to customers on quarterly, semiannual, or annual billing. The longer the billing cycle, the lower the price. With annualized billing, carriers have lower administrative costs, which include the costs of processing, printing, and mailing an invoice. They are willing to pass these savings on to customers because their own internal processes are streamlined. Table 1 shows typical pager pricing for a local digital pager.


Table 1: Typical Pager Pricing for Digital Pagers

Using the pricing shown in Table 1, a business with 10 pagers pays

10 pagers * $10 per month * 12 months = $1,200 per year

If the company converts to annual billing, it will only pay $800 per year. The hassle of receiving a bill and cutting a check each month is also eliminated. A customer can almost always cut its paging costs by shifting to annualized billing. But, if a pager is taken out of service during the year, make sure the pager company issues a prorated refund for the months that the pager will not be in use.

Save with term agreements
Like other telecom services, pager providers offer 12-, 24and 36-month term agreements. The carrier benefits by locking in the customer’s revenue for the entire term, and the customer benefits by receiving a lower monthly rate for each pager. Signing a 12-month term agreement with a paging supplier usually knocks $1 off the monthly cost per unit. A 24-month term agreement gives a $2 discount, and a 36-month agreement gives a $3 discount.

If the negotiated pager cost is already low, such as $5 per unit, a term agreement will probably not create any additional discounts. Paging is a low-margin business, and carriers make sure each transaction remains profitable for them.

A loophole with pager term agreements is that carriers sometimes fail to specify a minimum number of pagers. A business with 100 pagers that becomes dissatisfied with its paging company could theoretically move 99 pagers to another paging company and face no penalty with the original carrier.

Consolidate to one carrier
One of the most basic rules of telecommunications management is consolidation of services to one vendor. The majority of companies I have worked with use multiple paging vendors because they have no centralized control over their telecom services. Newly merged companies still use different vendors, and employees are often allowed to choose their own vendor. One single company site might have up to three or four separate paging providers. It is difficult for accounts payable and the telecom department to keep up.

For example, a leading managed-care corporation has more than 50 nursing homes. The company was aggressively buying and building new nursing homes at the rate of one per month. The new corporate telecom manager noticed the following trends:

- The staff at each nursing home used an average of five pagers.

- The corporation processed more than 100 separate invoices each month.

- Some invoices were for a single pager; others were for as many as 24 pagers.

- Ten different paging vendors were used.

- It took two full days each month just to process the pager bills.

- Although about a third of the pagers were with PageNet, the pagers were billed on a number of different invoices.

- The average cost for digital pagers was $11 per unit.

- Many of the accounts had pager protection, which cost between $1 and $2 per month.

The telecom manager decided to only keep the PageNet pagers and replace the others with PageNet pagers. PageNet assigned an account executive to the account, who immediately consolidated all billing into one bill that would be sent directly to the telecom department at the corporate office. Pager protection was canceled, and the large volume allowed the manager to negotiate a low price of $4 per unit.

In most cases, a national account is not cost effective, because pager companies cannot offer one price and one bill. Each region is run as a separate company and the pager companies can only offer price breaks based on the number of pagers in their own region.

Paging bills

Paging bills are the simplest telecom bills to understand. The bill shows each pager number with an itemized list of additional charges. These four charges are usually listed for each pager: equipment rental, service, maintenance, and usage.

Some paging carriers do not itemize their charges. They just give one line item for each pager, in which case the charge is normally for equipment rental and service. Some Mom-and-Pop carriers simply show the total charge on one line, such as “pager service for 26 units … $260.” The customer should always request an itemized bill in order to verify all of the charges.

The sample bill in Figure 1 shows that the customer is paying $5 per month for paging service and another $5 per month for equipment rental. This customer could save $10 per month by purchasing the pagers instead of renting them. One of the pagers has an 800 number that is being billed indirectly by the paging company. The bill also notes “001 Pager Contract,” indicating a volume or term contract has been signed. The bill gives no detail, but the carrier’s customer service representatives should be able to explain the terms of the contract quickly.


Figure 1: Typical pager bill.

Equipment rental

Some customers purchase pagers (usually from their carrier), but most customers rent them from their carrier. Businesses watching their cash flow may want to avoid the up-front cost of purchasing new pagers, but paging companies steer most of their businesses toward renting. Equipment rental for a local digital pager costs between $3 and $10 per month.

Rent or buy
One easy way to reduce monthly paging costs is to purchase pagers instead of renting them. The only real advantage of renting pagers is that carriers will repair damaged pagers at little or no cost to the user. If repairs are needed to customer-owned pagers, the customer has to foot the bill. But pagers are fairly low-tech and do not require much maintenance.

For example, a West Coast architectural firm rented 15 digital pagers from its carrier. Each month, the company paid $5 for rental and $6 for service. After performing a miniaudit of its telecom expenses, the company was surprised to learn it had spent more than $1,800 in rental fees over a 2-year period. When it first began using pagers, the company could have purchased all 15 pagers for no more than $750. It presented its findings to its carrier, which ended up giving the firm the pagers for free. Other paging companies may not have been as generous, but they would at least be willing to sell the pagers at a greatly discounted price.

Service

Paging providers bill for service in advance. This is the basic charge for paging; it covers the cost for the tower to transmit messages to the pager. The monthly service for a digital pager with local coverage is usually only $3 to $5.

PRP—Insurance for your pager
Pager maintenance programs, also known as pager replacement programs (PRP), and pager protection, function like an insurance policy. If the pager is lost, damaged, or stolen, the paging company will replace the unit for free. PRP for a digital pager usually costs $1 to $3 per month.

Save money on pager replacement programs
Consider this example: A northern California hospital used more than 100 pagers for its nursing staff. The hospital’s large volume allowed it to negotiate a low rate of $5 per month for each digital pager, which included service and rental. The pager salesman persuaded the hospital telecom manager to purchase PRP for each unit at a cost of $1 per unit and a $25 deductible to replace a pager.

The manager later realized that the nurses were very gentle with the pagers. Only one pager was lost or damaged each month. To replace the one lost pager, the hospital had to pay the $25 deductible. After adding this $25 to the $100 already spent for PRP, the hospital was spending $125 each month to replace one pager it could have bought for only $50. The manager quickly canceled PRP and ended up saving the hospital more than $1,000 in the first year. Five nurses would have to lose their pagers each month before PRP was cost effective (see Table 1).


Table 1: Pager Replacement Programs: Calculating the Break-Even Point

To determine whether or not your organization should keep or cancel pager protection, calculate your own break-even point. Then, find out how many pagers are lost or damaged each month; if you do not know, the paging company should be able to tell you.

Companies that are rough on their pagers should keep PRP. A company of rugged construction workers who destroy half a dozen pagers each month may actually save money by using PRP.

Usage
Paging companies originally charged customers a flat rate each month, but over the past few years, this has changed. Today, some providers also charge as much as $0.25 per message, but they generally give the user the first 100 messages at no charge.

Paging coverage areas

Paging service is offered in specific geographic areas. Unlike other telecom services, these areas are not dictated by government regulations. Paging service areas are only limited by the number of towers the paging company is willing to build. Paging providers usually divide their coverage offerings into three categories: local, regional, and nationwide. Table 1 shows typical monthly pager rates for a digital pager.


Table 1:Typical Monthly Rates for Digital Pagers

In metropolitan areas, customers can choose between numerous carriers, but in remote areas customers may have only one choice. In this case, there is little leverage to negotiate pricing. The paging company is the only game in town, and it can set its rates without being influenced by external factors, such as competition.

Local coverage
The most basic, and therefore most economical, paging area is called the local coverage area. Local coverage is usually the size of a small state or metropolitan area. Figure 1 shows Central Link’s local coverage area in the Waco, Texas, market. The paging towers broadcast in all directions, which results in a circular pattern around the edges of the coverage area.


Figure 1: Local coverage area for paging in Waco, Texas.

Statewide coverage
In large states, paging companies divide the coverage into two or three local areas. California is split into a northern and southern area. For the pager to work in both areas, the customer must pay for statewide coverage that costs a few dollars more than local coverage. Depending on the carrier, Texas has about seven local coverage areas. Paying for statewide coverage ensures that the pager will work in all seven areas. Figure 23.2 shows Page One’s statewide coverage in Texas. Note that the pager will not work in some rural areas that are not reached by Page One’s towers.


Figure 2: Statewide paging coverage map in Texas.

Regional paging
Most nationwide paging companies divide the country into four regions. Each region contains a dozen separate local coverage areas. This scenario is called regional coverage, and, of course, costs a few dollars more than local coverage. Figure 3 shows Arch Paging’s different regions.


Figure 23.3: Regional coverage area for Arch Paging.

Nationwide paging
No paging supplier offers true nationwide paging. Nationwide means the pager will work in the nation’s largest cities and usually along major interstates, but the service is choppy in remote areas. In 1983, SkyTel first offered nationwide paging, but today, many other carriers offer this service

Pager Level of service

The level of service provided by the paging carrier depends on the type of pager. The three types of pagers offered today are digital pagers, alphanumeric pagers, and two-way pagers. Some old-tone pagers are also still in use. Table 1 shows typical monthly pager rates:

Tone pagers

Tone pagers, or beepers, were initially used by people whose professions required them to be available at all hours, such as doctors. Tone pagers give off a tone only; they cannot send numeric messages. Tone pagers are definitely a telecom antiquity; it has been my experience that out of a hundred businesses, five or six still have tone pagers.

Save money on tone pagers
Ironically, tone pagers often cost more than digital pagers. During the past few years, competition has driven the cost of digital pagers down, but tone pagers are a small noncompetitive sector of the overall paging industry. Carriers and customers alike tend to ignore their tone pagers, and no one ever tries to negotiate lower pricing.

Replace tone pagers with digital pagers
Consider the following example: A West Texas oil drilling company used 20 tone pagers. When an employee out in the oilfield was paged, he knew it was time to return to the office. The system worked fine, and the company never felt the need to upgrade to numeric pagers. Since the 1970s, the company had been paying $15 per month for each pager. Eventually the company replaced the tone pagers with digital pagers for only $7 per unit. This change saved the company $160 per month.

Digital pagers

Digital pagers, also called numeric pagers, relay numeric digits to the user—normally, a phone number. Most pagers in service today are digital pagers. Digital pagers normally sell for $25 to $100, but carriers will often give the pager to a customer who signs a contract. Monthly service for a digital pager costs between $5 and $10.

Alphanumeric pagers

Alphanumeric pagers display numeric and text messages across a small LCD screen with up to nine lines. Many carriers broadcast news, weather, and stock quotes to the pager throughout the day. Alphanumeric pagers also come loaded with such features as distinct rings and vibrations, an alarm, message memory, calendar functions, and phone-number storage. They cost between $100 and $300 each. The expense for service is normally $10 to $20 per month.

Two-way pagers

Two-way pagers, such as Motorola’s Page Writer, provide traditional alphanumeric paging capability, but also give the user the ability to check e-mail, surf the internet, and read voice-mail messages that have been converted to text messages. Two-way pagers look like miniature laptop computers and even include a small keyboard. These pagers cost around $400, and service costs between $25 and $35 per month.

Long distance call

Just like landline calls, long-distance calls on cellular phones cost more than local calls. Long-distance charges on a wireless phone generally cost $0.10 to $0.25 per minute. The boundaries are different, however. Cellular home areas might be 10 times larger than a landline local calling area. A person calling from Vineland, New Jersey, to Philadelphia is subject to long-distance charges on a landline phone. Because both cities are in the same home area, a call on a mobile phone is treated as home airtime and is essentially a local call. But a cellular call from Vineland to Pittsburgh would be subject to long-distance charges in addition to home airtime charges.

Save money on wireless long distance
Cellular long distance is not as competitive as landline long distance, so callers do not have as many ways to cut the cost. Most users do have a few choices, however. First, call your carrier directly and ask for lower rates. Carriers usually have two or three different options. If you are still not satisfied, you can look into other long-distance carriers.

Many of the wireless carriers allow you to use a different company for landline long-distance. Your wireless provider can tell you which long-distance carriers are available. For example, Ameritech Cellular allows its Michigan customers to choose long-distance carriers such as WorldCom to carry the calls. If you already use WorldCom as your landline long-distance provider, your cellular long-distance charges can be billed on your long-distance bill.

Caller ID and calling party pays
Few things are more frustrating than having a phone solicitor call you on your cellular phone. They read their sales script to you, and you have to pay for the call. Most digital wireless phones are able to use caller ID. Your phone displays the number of the caller when your phone rings. If you do not recognize the phone number, you can refuse to answer the call. Screening out unwanted calls is the main purpose of caller ID. By avoiding these calls, you do not have to pay for them. Another way to reduce the cost of inbound calls is to use a fairly new feature called calling party pays.

Calling party pays is a so-called advanced feature, and wireless companies charge a monthly fee of $2 to $5 a month for this service. Once you have signed up for calling party pays, callers cannot reach you by directly dialing your number. If they dial your normal wireless phone number, they will hear a recording that explains that you have enrolled in a caller-pays program. In order to reach you, they must hang up and redial using:

1 + area code + your mobile number

The additional dialing is intended to tell callers this is like a long-distance call—they will pay for it. The caller is normally billed $0.25 a minute, and the charges appear on the caller’s local telephone bill.

Most businesses that use a lot of intracompany calling are better off without calling party pays. With the plan, their wireless bills are lower, but their local telephone bills will increase. With calling party pays, they pay $0.25 to call their own employees, who are in the field using wireless phones. If they cancel this plan, the call is billed on the wireless phone bill as home airtime. If the user has not exceeded the number of home airtime minutes included in the rate plan, the call is essentially free. Otherwise, the call will be billed under normal home airtime rates, which are always lower than calling-party-pays rates.

Full minutes or partial minutes
When shopping for a new wireless service provider, one should consider how the carrier bills the call time. Cellular calls have traditionally been billed in full-minute increments. A 2.5-minute call is billed as a 3-minute call. In the late 1990s, Nextel started billing in 1-second increments. The customer is only billed for two-and-a-half minutes for a 2.5-minute call. Most wireless phone calls are very brief, so the billing increment significantly impacts the actual monthly cost of a wireless phone.

Free first minutes
When PCS service was new, some carriers gave the first minute of a call at no charge. The free first minute was designed to stimulate more calling volume and, therefore, more revenue for the carriers. To find out the impact of the free first minute, simply look at the number of calls you made in a given month. The first minute of that call would have been free with a different carrier. Subtract the number of first minutes from your total airtime and recalculate the bill.

Free nights and weekends
Some carriers offer free nights and weekends for a flat fee of approximately $10 each month. Look at your call detail and add up the current cost of night and weekend calling. If it is regularly more than $10, you should sign up for this discount plan

Prepaid wireless & cloning

Prepaid wireless
The four rate plans described (emergency, individual, group, and corporate) all require customers to pay for access one month in advance. The calls are charged at the end of each billing month, so each phone bill contains charges for the previous month’s usage and the next month’s access. Prepaid wireless users never pay a fee for access. To begin service, a new prepaid wireless customer simply buys the phone and pays for a block of airtime, such as 500 minutes. Some carriers charge an activation fee, but most do not; they make up for this lost revenue by requiring users to buy the phone directly from them. Some advantages of prepaid wireless are that the carrier requires no term contract and does not perform a credit check on a new customer. In Asia, prepaid wireless service is the only offering.

When additional minutes are needed, the user must buy a card and input the data into the phone. Most prepaid wireless systems have time limits. For example, at the end of six months, the phone is deactivated unless the user buys additional airtime. Once the additional airtime is purchased, any minutes that remained on the old card will again be available to the user. The Tracfone prepaid cellular program in the United States requires users to buy new cards every 2 months. If the customer fails to buy a new card, the phone is deactivated and the phone number may be reassigned.

Save money with prepaid wireless
Prepaid wireless is best for people who only sporadically use the phone. If a user regularly has months with almost no calling, he should consider prepaid wireless to avoid paying an access fee in a month when he will not be using the phone.

Association discounts
Like other telecom services, such as long distance, some wireless carriers offer association discounts. Being a member of a specific organization such as a chamber of commerce, civic organization, or trade organization may qualify your business for an association discount. Regional wireless carriers are more likely to offer association discounts than nationwide carriers. A cellular company operating near the automobile factories in Detroit gives a 5% discount off the total cellular bill to businesses that belong to a certain manufacturing trade organization. To find out about association discounts, ask customer service or one of the carrier’s outside sales representatives.

Save money on features
The original cellular phones were cumbersome and came with no bells or whistles. Today, a host of advanced features are available. The most common features include the following:

Call forwarding;

Call waiting;

Caller ID;

Basic 911;

Voice mail;

Phone insurance.

Sometimes, these features are given to the customer at no charge, but other times carriers charge for the features. Telecom companies are notorious for nickel-and-dime charges that can double a monthly telephone bill. Sales representatives are given bonuses based on the number of advanced features they can sell.

The features are provided by the carrier’s network technology. Once the features are available in the system, they cost the carrier almost nothing. Consequently, every dollar spent on features is sheer profit for carriers. Ask the carrier to waive the charges for all features. If the company says its billing system will not allow it, ask for a one-time credit equal to the cost of the features for a year. If the carrier will not waive the charges, consider canceling any unnecessary features.

One of the most unnecessary features is mobile phone insurance. This covers repair or replacement of your phone if it is broken, lost, or stolen. This feature costs $3 to $5 per month. With the exception of construction workers, most mobile phone users are not too hard on their phones. Today’s phones are hardier than the original phones, and the new smaller sizes make them less susceptible to damage.

Cloning
Cloning is making fraudulent calls on someone else’s wireless phone account. The thieves use radio scanners at major roads to intercept a cell phone’s electronic serial number (ESN) and mobile identification number (MIN). Sometimes, industry insiders sell ESNs and MINs to the thieves. This information is then reprogrammed into another cell phone. The thieves then make calls that are billed on the other person’s account. They usually use the clone phone for up to a month. Once the billing cycle ends, the carrier, or the customer, notices the dramatic increase in calling volume and disconnects the phone.

Customers are not liable for fraudulent charges; carriers must write these charges off. Cloning and other cellular fraud costs carriers half a billion dollars each year. If your phone has been cloned, notify your carrier at once. You should dispute the charges, and the carrier will remove the charges from your account. To remedy the problem, you will probably be issued a new telephone number.

Corporate rate plans

Corporate rate plans
Most accounts only have one cell phone listed on the account. Customers typically activate only one phone at a time, and the phone is handled individually. Because of this, wireless carriers are not exactly sure what percentage of their customer base is commercial and what percentage is consumer. If, however, a business has multiple phones with the same carrier, it may qualify to be treated as a corporate account. Each carrier has a minimum number of phones to qualify for a corporate account. It may be as few as 5 or as many as 50.

If a business does not meet the minimum number of required phones, the carrier may make an exception and allow it to start a corporate account anyway. If a business is only one or two phones short of the minimum, it might cut its overall expenses by adding extra phones to qualify for the corporate account.

What is the advantage of a corporate account?
The main advantage of corporate accounts is that the monthly access charge is significantly reduced. Instead of paying hundreds of dollars a month in access charges, corporate accounts typically only charge $15 per phone. The corporate account for AT&T employees has a phenomenally low $10 monthly access fee and airtime only costs $0.10 per minute.

With individual rate plans, it is a gamble each month whether or not the user will use too many, or too few, minutes. In either case, money is wasted. Corporate accounts do not experience this waste. With a corporate account, high users pay a low rate for each minute, and low users only pay the minimal access fee. There are no surprises.

Pooled or not pooled?
Like small group accounts, some corporate accounts use a pool system for the airtime. A typical pooled corporate account may charge $100 for the first phone and $15 for each additional phone. A pool of 1,000 airtime minutes for all the phones to share is included in the plan. The customer must pay for any additional minutes above the first 1,000.

Nonpooled corporate accounts charge the customer a low access fee per phone and bill the customer for each minute of airtime. You probably will not be given a choice between pooled or not pooled, as most carriers only offer one or the other.

Using someone else’s corporate account
Some carriers allow two businesses to combine their mobile phones to qualify for a corporate account. As long as the carrier separately bills the two companies, this is a great situation. I have seen large companies combine with their subsidiaries, customers, suppliers, and even employees to qualify for a larger corporate account. A large business can use its leverage to help a smaller sister company qualify for corporate pricing.

Avoid fraud and waste on corporate accounts
Some businesses allow their employees to put their personal phones on the corporate pricing. As long as the company does not pay for personal phones or a sister company’s phones, this system works great. Larger businesses that do not routinely track their cellular phones and regularly audit their bills may end up paying for an employee’s personal phone. It is not uncommon for an ex-employee to continue using the company-issued cell phone for months after employment has been terminated.

If you are auditing your bills for the first time, find out the name of the user for each cell phone listed on the bill. Some carriers print the user’s name right on the bill. After reviewing your list of phone numbers and employee names, company department managers should be able to tell you which employees should be using company wireless phones. If you still cannot determine who the user is, call the number and see who answers. If all else fails, temporarily disconnecting the service should flush out the user. Be careful, because you may be surprised to learn whose phone you have canceled. I have canceled the phones of ex-employees, ghost employees, high-level executives, the college-aged children of executives, and even a high-level executive’s mistress.

Before disconnecting anyone’s phone, be sure your company’s executive staff are well aware of the pending cancellation. On an account with 25 or more phones, this type of common-sense audit typically turns up one or two illegitimate cell phones.

Remove high-end users from the corporate account
Customers that use corporate accounts will have one or more phones that stand out because they use more airtime than the other phones. A typical corporate account has 20 phones that each use about 100 minutes of airtime each month and one or two phones that use more than 500 minutes of airtime. In this scenario, the larger users could be pulled out of the corporate account and handled as individual accounts.