Negotiating telecoms contracts – are you getting the best value?

Telecommunications form a vital part of doing business today, and in many organisations the cost of this can be in excess of 2% of the company’s turnover, or even more in organisations that spend time proactively contacting customers and prospects

October 25, 2010

By Steven Woods, South African Country President at Compass Management Consulting

Telecommunications form a vital part of doing business today, and in many organisations the cost of this can be in excess of 2% of the company’s turnover, or even more in organisations that spend time proactively contacting customers and prospects.

While 2% does not sound like a lot, when you put this into figures, an enterprise with a turnover of R20 billion would spend R400 million on telecoms alone – a staggering figure that makes telecoms a significant cost item.

The industry itself is still very fast moving, and new technologies are being introduced often. Currently in the telecoms mix we have least cost routing, private networks and Voice over IP (VoIP), with the likes of Skype and Vonage adding to the mix.

Having an understanding of what technologies are out there and being able to effectively negotiate telecoms costs can therefore equate to substantial cost savings, not to mention the possibility of contracting better services that meet the needs of the business more accurately. However, when it comes to negotiating these contracts, there are several common stumbling blocks that can hinder the process.

One of the most common mistakes companies make is to assume that the telecoms provider has all of the power and that the organisation has no choice other than to take the deal that is offered. Locally this was the case until recently, because of the lack of options within the market, but now there are a range of options available and organisations should make certain they exercise the right to choose the best deal at the right price, with the right terms.

Another issue that affects many organisations is a failure to understand what it is they really require, what equipment they have, what they are using and what they are paying for. There may be multiple contracts in place that cover the same services, with different charges being tendered for the same services.

Conducting a baseline assessment can help to address this confusion by delivering a detailed inventory of existing services, technologies and rates. Comparing specific inventory items against their invoices and contracts is the only way to establish effective rates and define usage forecasts in terms of volumes and technologies.

Even without these problems added into the mix, another mistake that is commonly made is allowing the vendor to use its ‘published rates’ as the basis for negotiation or discounting. These published rates can be very misleading, making no allowance for credits, free services, sign-up bonuses, volume breaks or special arrangements.

When negotiating a telecoms contract it is far better to understand the true underlying rates, which are prone to change at any time. A market price benchmark will give a clear indication of the true current market prices that an organisation can expect to pay for services, based on real net rates that are currently being paid.

The actual negotiation process can be a tricky one, with one of the key challenges being to get the right level of attention and focus from the vendor/s. Generally an organisation will be offered a fairly standard contract with a small level of discounting.

The key to increasing this discount and getting the best possible deal is to seriously get the business on the vendor’s radar through escalation with the vendor organisation. Provide written documentation of the contract requirements in terms of rates, quality of service and benchmarking provisions. These terms will then be sent up the chain of command in the vendor organisation for a response.

When seeking alternative service providers it is vital to develop an effective RFP document, which requires a clear understanding and articulation of the business needs. A baseline analysis is essential here to define targets and expectations. Given the volatile nature of the telecoms market, the RFP should also contain a provision for annual benchmarks against market rates. Finally, in order to ensure quality of service, the terms must include non-linear credits for service outages.

Negotiations themselves should be conducted with the two best respondents from the RFP process. Some guidelines to consider include: rejecting the notion that pricing is volumetric, in other words that committing to higher volumes equals a higher price break; ensuring that SLA credits are nonlinear; and negotiating charges relating to implementation, conversion and installation. Also, organisations should not pay for systems before they are up and running, and should ensure that contracts allow for an escape to best contract in case of divestment or acquisition of the business unit.

Internal benchmarking can assist in the negotiation process by providing the organisation with an objective, well-informed, third party analysis from specialists in telecoms and network issues, which can play a valuable advisory role in response assessments.

This baseline, or benchmark, can help to quantify and provide details of the organisation’s actual telecoms spend, and these findings can then be used to drive negotiations with incumbent vendors. The findings can also guide plans for new technology, business growth and expectations for future rates and terms.

In order to effectively negotiate with vendors, organisations need to understand where they are starting from, what contracts are currently in place, what cancellations clauses exist, and whether there are multiple contracts or different rates for the same services. From there it needs to be decided what range of services will be fit for the purpose of the organisation, and a view needs to be established of how requirements will change over time.

Then organisations should decide whether they will get a better deal with one vendor or by taking a multi-vendor approach. By tackling these issues organisations will ensure that the right deal is in place, with the best possible savings and a solution that is fit for the purpose of the organisation.