There was a Twilight Zone science fiction story released in 1959 entitled “To Serve Man.” In it, aliens come to earth and begin to do all sorts of wonderful things for humanity–they end war, cure disease, advance technology, etc. When asked why, they invariably say that they wish to serve man, and point to their handbook, which has that title. As the story ends, a human linguist translates the handbook and finds that it is really a cookbook.
The moral, of course, is that the obvious is not always the real.
So it is in negotiations with telecom carriers; if you do not understand how carriers behave and operate, they will eat your profits.
To understand how carriers approach negotiations with their customers, we must remember two things:
- Carriers have a monopolistic mindset and
- They are concerned with their bottom line, not yours.
To our first point, carriers were monopolies for over 100 years, until the 1980s, when the US court system forced Ma Bell to break up. For the last generation, AT&T has been trying to put Ma Bell back together and reconstitute its monopoly. In many other countries, telecom has been and continues to be a monopoly. These monopolies exist either through direct government control of the network assets (typically one government-owned telegraph or telephone company, which grew organically into other related telecom areas, such as Internet, Wireless, etc.) or through domination of the market by one company working hand-in-hand with the local governmental authorities. All monopolies, and those attempting to either return to a monopolistic or majority ownership state, fear competition and generally are willing to use all means at their disposal to avoid having to compete in the market. This drives their negotiating strategy.
As long as your business needs telecommunications solutions and as long as you are unwilling to pay full retail, carriers will continue to try to obtain the most favorable–for them–terms they can from you during negotiations. They will try to lock you into long term contracts at high prices, make it difficult (if not impossible) to switch carriers, and attempt to effectively convert your own employees into advocates for the carrier, rather than for you. As we are no longer living in the 80’s, carriers will no longer attempt to bribe your employees, but they will seek to “cultivate a relationship” with those employees they have direct access to by offering entertainment (baseball or football tickets) small benefits, and the like. This is done out of an attempt to solidify a business relationship and it’s done for a very specific purpose.
When it comes time to negotiate a telecom agreement, carriers rely on two things. First, the relationship that has been forged and second, the fact they know it’s difficult for most companies to change their providers. It can be a time-consuming process, yes, but more often, it can be nearly impossible to change due to contract constraints that the carrier negotiates into the agreements over time. Here’s just one example of what we see every day:
In year one Company X signs a contract with carrier calling for a minimum spend of $100,000 per month for three years and a shortfall clause whereby you will pay that $100,000 no matter whether you use that much of the service or not. This is called a “take or pay” agreement. At the time of the contract is executed, this might be 80-85% of what Company X spends on telecommunications, so Company X feels comfortable they can meet this commitment
However, partway through the contract term, the economy goes into a recession and Company X has to close an office or manufacturing facility, and as such, can no longer meet the $100,000 minimum spend commitment. At the end of the contract term, Company X finds they now have a $1,000,000 shortfall which, according to the contract, it has to pay to the carrier. “No problem,” says the carrier, “we’ll just hold that in abeyance and we’ll sign a new 3-year term with a higher commitment, say $150,000 per month because the economy is certainly going to improve and then we can apply any excess spend over that to your prior shortfall” (with the implied threat that if you do not renew with the carrier, the $1,000,000 will become immediately due and payable—which will certainly result in someone losing their job).
At this point in the negotiation, the carrier knows that Company X has no choice but to renew. In addition, the carrier also knows that they have no reason to discount Company X’s rates. Why? Because if the carrier discounts the rates further, Company X will shortfall even further at the end of the new contract term, and also because Company X has no leverage to negotiate such discounts as they currently have a $1,000,000 debt owed to the carrier.
OK, now Company X is wondering “how did the carrier do this”?
- First, Company X allowed the carrier to put them in a commitment that was out of reach. Perhaps whomever agreed to the contract was unaware of the amount that would be spent (this is very common) or they trusted the carriers numbers that the commitment was attainable based on the business relationship that has developed.
- Second, the carrier started the negotiations for the new contract term from a position of strength–you were upside down on the first contract, so they had a $1,000,000 bill to hold over Company X.
- Third, the carrier began negotiating with the “floor” being the first contract, instead of the floor being what the current market would offer for Company X’s business.
- Fourth, the carrier built in a resistance to change by co-opting Company X’s internal experts, by forging a business relationship with them. Thus, Company X’s experts become advocates for the incumbent carrier rather than being unbiased (“we don’t know that another carrier would be as reliable,” “it would cost a lot to change out our network,” “training people to use a new system would take time,” “we could lose a lot of customer calls during the changeover”).
- Fifth, the company waited until they knew Company X would not be able to meet its commitment before discussing the renewal agreement. This gave Company X less time to consider its options and to plan for and implement any changes which could be made. Thus, Company X would be more likely to remain with the incumbent carrier.
Does any of this sound familiar to you? If so, the question you are likely asking yourself is, “What can I do to avoid being taken advantage of by the carriers?”
One important strategy you employ is to be sure to treat carriers like any other commodity-driven vendor. This can be difficult, as telecom networks are integral to our ability to do business and we do spend a lot of time with our telecom account managers. But if the carrier feels the distance in the relationship, they will work harder to try to close it and will also respect you more for keeping it. Another is to ensure to never sign a contract without doing the math. Companies should never be more than 50% committed to any given carrier without very specific reasons. Ask the carrier to provide you with proof on how the commitment will spend itself out over the term of the agreement and then double check the math yourself. Be sure to take into consideration any reductions in staff or locations that you may be aware of to ensure you won’t shortfall during the contract term.
AIQ’s experts are also standing by to help. With 30 years of Telecommunications cost-reduction and negotiations expertise, we are passionate about ensuring our clients get the most from their networks with contracts that include market-leading rates and the best contract terms, conditions and Service Level Agreements available. Visit us at www.auctioniq.com or contact us at 801-727-4007 to see how we can help you get the most out of your telecommunications contracts.