The Telecom Procurement/Contract Review

The following are guidelines and concepts that will likely provide many benefits if they are included in contracts. This is not an all-inclusive list of contract terms and conditions to review but serves as a sampler of some important contract elements:

• Tiered pricing. As the volume of purchases goes up, the discount applied off tariff should be greater. For example, domestic long-distance minutes might be 40 percent off tariff for the first 15 million minutes, 44 percent off for the next five million, and 46 percent off the next ten million minutes. Volume should always drive price.

• Most favored customer clause. The customer should get the lowest rates available to any of the vendor's customers of like volume and circumstances. If Billy Bob has 20 million minutes a year and gets 5.5 cents per minute on 800 service terminated to a dedicated location, then Mary Jane should get the same price, as long as she has the same volume of minutes and terminates in the same way (not switched).

• Technology upgrade. If the customer elects to use a newer technology, provided by the same carrier, to carry its traffic or perform other functions, then there should not be a penalty for converting to the newer technology. For example, assume that a business is using T1s to carry voice traffic and then elects to use a new technology provided by the same carrier to carry the traffic (e.g., VoIP). In such situations, penalties for drops below minimum requirements should be waived.

• Renegotiation. There should be at least an 18-month annual renegotiation for a long-duration contract. The parties should negotiate in good faith to ensure that pricing is "competitive" in the marketplace. Many contracts specify 12 months and some firms, for example, have the right to renegotiate every six months.

• Business downturn. If a division or business unit is sold or discontinued, the minimum annual commitments should be reduced by a pro-rata amount.

• Poison pill. Avoid a "poison pill" of zero discounts at some very high level of minutes that the vendor assures the buyer will never be reached. The purpose of the poison pill is to ensure that resellers do not grab the contract and resell the discounted minutes at a higher rate. In one situation, a firm's usage exceeded its wildest expectations and got hit with high incremental prices. It helps the carrier but does nothing for the customer.

• Exclusive contract. While it might be an advantage for the customer to use only one vendor, it is rarely advantageous to contractually specify that one firm is the sole provider. In fact, in a large organization, it is virtually impossible to police the network and ensure that a "renegade" department manager or field operator does not cut a deal with the local telco.

• Special requests. If the customer wants network maps, escalation procedures, vendor personnel on site, or other special requirements, putting those requests in the contract is the best approach.

• Discount-usage match. The value of the contract depends largely on how well the discounts on particular services match the actual usage. For example, 12 cents a minute to London from Denver is of little value if the company does only a couple of hundred minutes a month to that location. Categories include interstate, intrastate (varies by state), inbound, outbound, 800, calling card, domestic, international, Frame Relay, T1, T3, OC3, E1, etc.

• Installation waivers. Carrier installation costs should be waived for T1 and T3 installs (they may require the circuit to be in place for a year)

• Penalties. Carriers should always agree to a pro-rata refund if a leased line is down. Additional penalties can also be negotiated as part of a service level agreement.

• Minimum annual charges. The customer should be reasonably certain that minimums will be reached to avoid penalties. Negotiate for lower minimums. Consider the possibility that dedicated circuits may be economically justified; if X number of minutes to a specific location (e.g., Paris, France) are committed in the contract, the loss of those minutes could result in a penalty.

• Sub-minimums. Avoid excessive sub-minimums — some carriers require a specific quantity of 800-number minutes, switched minutes, Frame Relay circuit dollars, etc. The customer can get locked into a confusing hodge-podge of minimum commitments that must be monitored. Ideally, there should only be a few minimums or one large-dollar minimum (large-volume minimum).

• Audio conferencing. Consider carefully the IXC's audio conferencing service. If it is on par with other external firms, then it may be beneficial to add those minutes into the contract. However, if a large volume of minutes is used, the client may want to consider using in-house audio conferencing where the incremental "meet me" bridge cost is zero (of course, the up-front equipment investment as well as administration time must also be considered).

• Ramp-up period. If a customer has multiple carriers that are being consolidated into a single carrier (usually the most economical alternative), the contract should specify a reasonable "ramp-up" period. During this time, the customer can convert existing agreements to the new contract and identify all relevant locations (more difficult than it appears). Pricing during the ramp-up period should be no different than when all volume commitments have been met.

• Preparation for contract negotiations. The more information on volumes (particularly international locations), the better the deal a carrier can offer (if they feel the competitive pressure). Volumes (minutes) should be available as follows:

  • Interstate

  • Intrastate (by state)

  • International (by country)

  • Switched, dedicated, and "mixed" traffic

  • Audio conferencing

  • Inbound

  • Outbound

  • Toll-free volumes (domestic and international)

  • Directory assistance

  • Cellular long-distance

  • Video

  • Calling card (also by categories)

  • Data circuits: T1, T3, OC3, Frame Relay, ATM, etc.

• Ancillary services. These services should be defined and agreed upon. For example: Who issues the calling cards? How do calling cards get billed back to the individual business units/employees? Who deals with urgent matters (e.g., it appears that a card has been stolen — who authorizes cancellation of the card and issues a new card)? Who works out the procedures to cancel cards when employees terminate?

• Toll fraud monitoring. Does the carrier monitor for toll fraud? Is there a list of key employees at every relevant location that can make a decision on what facilities to keep open or shut down if toll fraud is occurring?

• Toll fraud insurance. The carrier should provide toll fraud insurance. Deductibles should not be excessive (e.g., not more than $15K to $20K per incident). Review the terms to ensure that the organization can comply and not have a false sense of security. For example, most toll fraud insurance terms require that DISA be disabled.

• Combined services. If the carrier offers both IXC and LEC services, there should be a significant reduction in pricing for those locations that elect to combine both services.

• Service provisioning. The carrier should maintain detailed electronic records of all orders (circuits, bandwidth required, locations, owner, characteristics of the circuit, etc.). Many are now offering browser-based packages that the customer can use to monitor the progress of the installation. The customer should receive regular status reports. No circuits should be implemented or disconnected without going through appropriate customer notification (change control).

• Network optimization. The carrier should commit to a periodic (quarterly; semiannual or at least annual) optimization review. For example, are there two T1s that are going from HQ to the same city but owned by different business units? Could they share the T1? Are there switched locations that can be converted to dedicated locations (this is critical and should be an ongoing review process)?

• Reporting. The carrier should provide extensive monthly reports showing volumes, commitment compliance, trends, and any management issues.

• Calling cards. Plans should be examined for options such as an 800 number to get into the carrier's network. With this feature, setup costs should be significantly reduced. A better option (if the carrier's billing system can do it) is to have the customer employee dial 0+ and have the carrier's network recognize that it is a card on "XYZ's" corporate plan and automatically provide the lower setup fee.

• Billing details. Is billing in six-second increments? Is there a minimum of 18 seconds? Does the firm have applications (modems) that have minimal duration calls?

• Options. What financial options are available? Are there up-front credits? Is there a bonus when certain volumes are reached?

• Exception reports. Will the carrier run regular exception reports such as longest calls (maybe modems got "stuck")? Calls by area code or city? By type of traffic?

• Carrier international relationships. What international relationships does the carrier have? Does the carrier have any global plans for specific international cities?

• Billing details. What are the nitty-gritty billing rules? For example, if a fax machine tries multiple times to reach a location (most relevant for international faxes), does the carrier bill for repeated tries or only for actual minutes after connection?

• Single points of contact. Will the carrier identify an individual to be the customer contact point for troubleshooting?

• Rollover terms. What are the rollover terms? Does the contract stop on the termination date or roll over if no notification within 90 days?

• Mobile phone negotiations. Will the cellular provider PICC all long-distance calls to the organization's carrier? What are the time of day/weekend terms? What are the roaming conditions? Is there an on-site service rep? Can executives get premium support? Does equipment always have to be ordered from an out-of-town location, or is there a store on hand for emergencies/executive needs? Does the cellular provider have GSM phones? Are the GSM phones linked to the employee's account? How is billing done — individual statement or mass bill? How are defaults handled (employees who leave the firm or make phone calls they cannot pay for — yet the company has "guaranteed" payment of the bill to get the lowest rates)?

Reasons for Telecom Bill Discrepancies

Telecom service providers, their competitors, and business customers all play a role in inaccurate bills. Let us start with the pivotal 1996 Telecommunications Act.

Telecom Service Providers

The Telecommunications Act of 1996 dramatically altered the telecom landscape by deregulating telecommunications. The resulting fierce price competition in long-distance rates, which drove down telecom service providers' revenues, prompted a decline in customer service levels that often leads to inaccurate billing.

Historically, a carrier's customer account manager may have supported a few major business accounts. However, with the pressure to control costs and boost profitability, the same account manager now services more accounts with less time for each one. Turnover and the lack of adequate training may also contribute to declining service levels.

For example, one long-distance provider's sales representative insisted to a client that his firm did not offer toll fraud insurance. He was somewhat embarrassed when shown the details of a toll fraud offering on his firm's public Web site. Telecom account managers must understand their customer's business and telecom usage, as well as their own offerings. Otherwise, service orders may not be correctly executed and billed.

Overly Aggressive Competitors

The Telecommunications Act of 1996 ushered in new competitors eager to aggressively increase their market share in the local and long-distance markets. The terms "slamming" and "cramming" were quickly added to the telecom lexicon as some service providers allegedly engaged in illegal business practices to gain new customers.

Slamming
Slamming is the illegal practice of switching a company's preferred local or long-distance service provider without explicit authorization. When a company orders telephone lines from the local telephone company, it specifies the preferred long-distance carrier for each line. The preselected long-distance carrier for a telephone line is commonly referred to as a PIC (preferred interexchange carrier). In telecom vernacular, we say that the line has been "PICed" to a particular carrier.

Telephone customers are slammed in a variety of ways. A common method is the use of forged copies of Letters of Authorization to the local telephone company, which "authorize" switching the PIC to an unauthorized provider. In another method, a service provider contacts a customer about new services but does not inform the customer that selecting the new service will also result in changing the preferred long-distance provider or PIC. In some cases, particularly for residential services, truly deceptive practices have been used. For example, "free" raffle tickets at retail malls have tiny print at the bottom that authorizes a switch from one carrier to another. When unsuspecting victims fill out and sign the raffle ticket, they are unknowingly authorizing a carrier change.

Cramming
Cramming is the illegal practice of adding charges to a business telephone account for products and services that have not been authorized. In one press release by the Federal Communications Commission (FCC), a service provider was fined for placing "unauthorized fees for 'membership' in the 'Friends to Friends' psychic services hotline and 'other' charges on consumers' telephone bills." What the FCC found particularly egregious about these violations was that many customers were billed for these services although they had no contact with the service provider or the psychic services hotline.

PricewaterhouseCoopers has encountered several cases of cramming in its bill audits. While auditing bills for a global professional services firm, there was one office with a telephone line that was billed twice for voicemail — by two different service providers. If a representative from either service provider had called the telephone number prior to cramming the line, he would have found that the line already had voicemail — from an onsite Avaya voicemail system that the firm owned. Another common example of cramming is a charge for "inside wiring," which is, in most cases, an unnecessary line maintenance fee.

Business Customers

One major business issue that corporations face today is how to react to business cycles and rapidly changing economic conditions. Corporations may engage in mergers, acquisitions, and right-sizing activities. Without adequate telecom cost controls, businesses may drive up their total telecom costs, which hurts the IT budget and the earnings before interest, depreciation, taxes, and amortization (EBIDTA).

Reacting to Cyclical Business Activities
Business expansions and contractions involving significant changes to employee headcount directly impact telecommunications costs. Typically, these business activities result in overpayment for unused circuits and inappropriate services.

In an expansionary period, a company providing services to its new employees may incur significant expenditures for installing lines to the employee's desk, purchasing hardware such as additional cards for the PBX, or provisioning additional trunks from the telephone company. Services such as call forwarding may be inappropriately provided to employees who staff inbound contact centers. Employee telephone abuse is frequently attributed to call-forwarding features that allow employees to forward toll-free phone calls from friends and family to the employee's home after business hours.

In an optimal control environment, appropriate controls are implemented to ensure new telecom assets, and services and telephone features are authorized and commensurate with job responsibilities. Replacing antiquated, manual chargeback systems with automated, scalable systems provides an additional level of control. Employees and their cost center managers can monitor their own network, calling card, and long-distance usage, and report fraudulent activity to appropriate personnel.

During economic contraction, when the organization typically reduces headcount, telecom assets such as cell phones, pagers, calling cards, and radios may not be recovered. Also, services may not be disconnected appropriately. Experience shows that ineffective asset management contributes to losses. The exit interviewer may not have objective information on the departing employee's telecom assets (cell phone, pager, calling card, etc.); sometimes, information from Human Resources is not current. The net result is that services may continue to be provided to the terminated employee for months after termination.

Effective controls ensure that any reduction in workforce will trigger a set of actions to identify and recover assets and remove services. Without adequate controls, cost centers could be inaccurately billed for usage and equipment charges; significant business risks are incurred from disgruntled individuals misusing or compromising telecommunications services and systems.

Consolidating Offices after Mergers or Acquisitions
Companies that merge with or acquire another entity typically relocate or consolidate offices. Without appropriate bill review processes, consolidation activities frequently lead to paying for unused services and dangling circuits — circuits that are not terminated at one endpoint — because they have not been removed from the telephone company's billing records.

Although the local telephone company has disconnected the enterprise's circuits, the long-distance carrier can still render usage charges. The enterprise is essentially paying for someone else's long-distance services. This situation occurs when the local telephone company reassigns the circuit to another enterprise. If the circuit has not been removed from the original enterprise's long-distance carrier's database, the long-distance company will continue to bill the original enterprise for all usage charges incurred by the new circuit owner.

Implementing Technology Solutions
The advent of the Internet, intranets, and extranets has placed increased demands on network bandwidth and availability. Enterprises are upgrading voice and data infrastructure to enable Customer Relationship Management (CRM) solutions, E-business, and other strategic initiatives.

Customers expect a prompt response, whether they are purchasing by telephone or the Internet. If Web-enabled transactions slow to a crawl, customers will buy from a competitor's site. CRM technology investments are unsuccessful if the most profitable customers get busy signals from the contact center or encounter an auto-attendant nightmare. The enterprise will most likely lose the sale — and possibly the customer.

Companies competing for mind share with today's sophisticated consumer must continue to improve the quality of the customer's experience with the contact center. Today, the customer's attention span is shorter than ever. Customers have more choices, easier access to information, and higher expectations of service and availability.

In response to these concerns, companies traditionally increase bandwidth without appropriate consideration of costs. That is, they may hurriedly throw excess bandwidth at the problem rather than taking the time to adjust in proportion to actual need. The need for more capacity, more services, and more fault tolerance capabilities must be balanced with the need to control costs. Too much capacity leads to excessive costs. In a recent audit, one enterprise added more than a dozen long-distance T1s as a contingency for Y2K; six months after the millennium change, the excess T1s were still in place.

Adding services without appropriate capacity planning can result in paying for unused circuits and services. Asset management systems that inventory line, circuit, and hardware assets, coupled with real-time monitoring of network and trunk utilization call accounting reports, will help control over- and undertrunking.

Save Money on Telecommunication

Save money with association discounts
AT&T’s Profit By Association (PBA) plan gave it a highly effective marketing tool. A customer who was a member of one of many associations, such as AAA, received an additional 5% discount. The long list of approved associations allowed almost every business to qualify for the PBA discount. The plan was very successful in drumming up new business for AT&T, especially when sales representatives set up a new PBA through the local chamber of commerce.

If your business has no membership in a participating association, consider joining one if for no other reason than to cut your long-distance bill by 5%. One enterprising AT&T account executive in Illinois created his own Secretary’s Association. Any business that has a secretary can join the association by paying only a $10 annual membership fee. Because every company has a secretary, the sales representative was able to offer this additional discount to almost all of his prospects. Similar association plans are available with other carriers.

Save money with international discounts
Enrolling in an international discount plan can be an effective way to cut your long-distance bill. These plans give an additional discount on international calls to one or more countries of the customer’s choice. AT&T’s plan, called the Favorite Nation Option, gives the customer an additional 10% discount on calls to a single country. Other carriers offer a discount on a group of countries, such as Latin America or the Far East.

Save money with referral programs
From time to time, long-distance carriers may offer a referral discount plan. Before LCI merged with Qwest, it offered a Goose Eggs referral program. This program gave a company an additional 2% discount for every company it referred that switched its long distance to LCI. The goal was to refer 50 customers, which would result in a 100% discount. The customer would then receive his bill every month with “goose eggs” in the bill’s amount due section. Other referral programs apply discounts based on the bill volume of the company referred. So if the new customer spends $1,000 per month, the referring customer sees a $50 credit on her bill each month.

Points programs
Some carriers have created their own points programs similar to the airlines’ frequent flier mileage programs. For the past few years, Sprint’s Callers’ Plus Points program has been very successful. For each dollar spent on long distance, a customer earns one Callers’ Plus point. Every 50 points can be applied as a $1 invoice credit, or the points can be redeemed for merchandise from Sprint’s catalog. The catalog contains items such as televisions, hotel nights, and office supplies. The catalog is often an attractive option for a company controller, because merchandise can be secured without using money from a budget.

Participating in this program may be a hassle, but the additional 2% bill credit may make it worthwhile.

Long-distance pricing : Outbound long distance

Long-distance calls are processed through the long-distance carrier’s network differently, based on whether or not the call type is outbound, inbound, or calling card. Because each call type uses different telephone company resources, the rates differ. When a carrier sets its rates, it has to consider the cost of access at the point of origination, the cost of transporting the call across long-distance lines, and the cost of access at the termination point. Figure 12.1 shows the different cost elements of a long-distance call.


Figure 1: The cost of a long-distance call has three parts: access on the point of origination, transport, and access at the point of termination.

In Figure 1, Jerry in Dallas, Texas, pays $0.12 a minute to call Linda in Atlanta, Georgia. His long-distance carrier does not own the physical phone lines from Jerry’s house to Linda’s house; it only owns the lines connecting the central offices. Lacking an end-to-end network, it must pay access fees to the local carriers on both ends for the use of the line. Access fees are between $0.02 and $0.04 per minute. Long-distance carriers argued for years that the access fees paid to local carriers are inflated and should be reduced. In this example, Sprint pays $0.06 in access fees and keeps the remaining $0.06.


Outbound long distance

Telecom Cost Management : Rate increases

Another problem revealed in the contract quote is the potential for rate increases. A few times each year, the major long-distance carriers increase the gross rates listed in their tariff. Over the past decade, a typical rate increase is 3% per quarter. Under this system, a customer’s rates will have increased by more than 30% over a 2-year period.

For example, Acme Manufacturing spends $10,000 per month in long distance. Its current contract is about to expire, so the company’s AT&T account executive offers a new contract. The proposal shows that the new pricing plan will drop Acme’s monthly billing to $8,000. Acme, excited about saving $2,000 per month, signs a new contract with AT&T, which explains that the only way to get these great prices is with a 3-year agreement.

Every quarter, AT&T implements a 3% to 5% rate increase, and most customers never notice. If a customer notices the increase, he figures it is because employees are making more calls than before. After 2 years, Acme’s bill is back up to $10,000, thanks to the rate increases.

AT&T then informs the customer of a new pricing plan that will cut the bill by $2,000 per month. The account executive says AT&T will be happy to void the current contract as long as it is replaced with a new 3-year contract. Rather than pay an extra $24,000 over the course of the next 12 months, the customer signs the new contract. And, you guessed it, every quarter the rates are incrementally raised, starting the cycle all over again.

The only way out of such a cycle is to bite the bullet and complete the third year of the contract. At that time, the customer will have maximum leverage to negotiate a better plan with the current carrier or may then switch to a lower cost carrier that guarantees its rates, such as Qwest, McLeod USA, and a host of resellers.

Carriers do not guarantee their rates because they fear certain market forces that could affect their revenues, such as inflation and new technologies. Ten cents a minute for long-distance calling is used as a benchmark today. If all the carriers guaranteed to charge their customers only 10 cents a minute, inflation would eat away the carriers’ profits. New technologies such as free voice calls over the Internet also threaten a carrier’s revenue potential.

The average phone company executives are eminently more concerned with pleasing their stockholders than they are with pleasing their customers. “Creating stockholder wealth” is the mantra for most companies. Sometimes the only way to take care of stockholders is to neglect customers.

Telecom : Tariffs

Tariffs are filed with both the state and federal government. Tariffs governing interstate services are filed with the FCC, while tariffs governing intrastate services are filed with the state’s Public Utilities Commission (PUC). Telecom tariffs contain information on services offered, terms and conditions, and pricing. When a customer signs up for a new contract with a long-distance carrier, the contract always refers back to the tariff, and many of the specifics, such as price, are not documented in the contract itself.

The following quote is from an AT&T contract that illustrates that the rates are not disclosed in the actual contract but listed in a tariff. The two-page contract was offered to a customer with a 24-month term commitment and a $1,000 gross monthly revenue commitment. This contract is probably the most common long-distance contract in force today, and it serves as an accurate representation of the industry as a whole.

The service and pricing plan you have selected will be governed by the rates and terms and conditions in the appropriate AT&T tariffs as may be modified from time to time ¼ AT&T reserves the right to increase from time to time the rates for the services provided under this tariff, regardless of any provisions in this tariff that would otherwise stabilize rates or limit rate increases¼ (AT&T’s Business Service Simply Better Pricing Option Term Plan Agreement).

The contract quote reveals that rates are not specifically listed; instead, the customer is referred back to the “rates and terms and conditions in the appropriate AT&T tariffs.” The sad news is that the average customer never sees the tariff. In many cases, the actual phone company sales representative who is offering the contract has never viewed the tariff either and is only familiar with the sales literature, proposals, contracts, and billing. I have negotiated more than 200 long-distance contracts. In only one case was the actual tariff provided to the customer, and in that instance, it was not because of a pricing issue.

Tariffs

Telecom : Managing your payphones

Many businesses have on-site payphones. The local phone company either owns the phones or they are customer owned. If the local phone company owns the phones, then the business owner normally pays a monthly fee to the local phone company for the payphone. The payphone bill is almost identical to a local bill for a regular business phone line. The charge for the payphone is usually about the same as the charge for one flat business line: about $40 per month.

Eliminating payphone bills
The problem with paying the local phone company to have a payphone at your site is that you are paying the company so it can earn money from your employees. Not only does the carrier earn $40 a month from you, but it gets all of the coin revenue and probably receives a commission on all operator-assisted calls, collect calls, calling card calls, and long-distance calls from the payphone.

- The “$4 rule” has long been a standard with payphones. If the payphone is earning $4 or more per day in coin calls, then the local phone company will discontinue billing you the monthly fee and instead will pay a commission on the calls.

- A typical business has multiple payphones at one facility. If most of the payphones are meeting the $4 minimum, then an overall commission agreement may be negotiated with the local phone company. Commissions on payphone calls vary from 5% to 25% of both the coin and long distance revenue. The commission checks are usually paid monthly or quarterly.

- If the local phone company is unwilling to waive the monthly fee for the payphone due to the low amount of calling, you may consider canceling the service altogether. If you have multiple payphones in one location that are not producing significant call volumes, consider reducing the number of phones until the $4 minimum is met.

The complete do-it-yourself telecom audit

Anyone can successfully perform a telecom audit. If you are already familiar with your own services and willing to spend a couple hours a month reviewing your bills, you can trim your telecom costs by hundreds or thousands of dollars each month. I will explain a simple step-by-step method for performing a complete audit of all your telecom services. Many professional telecom consultants and bill auditors use this same approach.

Numerous phone bill auditing firms have sprung up in the last 10 years. These firms provide a valuable service for businesses that lack the time and expertise to audit their own phone bills. These consultants are either paid an hourly rate or a percentage of the savings and refunds that they generate. They prefer to work with customers whose monthly phone bills total $5,000 to $50,000. Smaller companies keep a close eye on their expenses, and larger corporations have a full-time telecom staff that manages the services each month. When customers keep their phone bills clean, there is less opportunity for the consultant. But no matter what size your company, you need a strategy for controlling and minimizing your telecom expenses.

The audit method explained is a comprehensive system to manage all of your telecom expenses. This system is scalable. You may not have the time to perform a complete audit; you may only be concerned about one of your services. In that case, you can use this book as a reference tool and selectively attack one telecom service at a time. But if you have time and follow this plan, you will know exactly what services your organization uses, as well as the exact cost for those services. You will then be able to cut your costs by thousands of dollars.