White Paper:

5 Essential Steps to Better Telecom Contract Negotiations

By Suzanne Rosato, Esq. Vice President, Strategic Consulting

Tangoe, Inc. 35 Executive Blvd. Orange, CT 06477 Phone: 203-859-9300 www.tangoe.com

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Executive Summary
The objective of this white paper is to provide a high level overview of five of the major steps in the process of negotiating agreements for telecommunications services with service providers. The essential five steps that will be discussed are:

1. Developing an Inventory 2. Deciding on a Strategy 3. Presenting Requirements or Issuing a Request for Proposal (RFP) 4. Analyzing Offers and Addressing Deficiencies 5. Getting to Contract The art and science of telecom contract negotiations is extremely complex and not something that can be completely learned or understood in the time it will take to read this white paper. The goal here is to offer brief insight into the five key steps within the negotiation process, and shed a little light on how they pertain to you, the potential client, as well as the potential service provider(s). Many of the best practices shared are based on decades of field work and thousands of actual negotiations. If your organization is about to embark on a quest for telecommunications services, these are the basics steps you should take in order to achieve the greatest financial savings for your company while minimizing risk.

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5 Essential Steps to Better Telecom Contract Negotiations

Step 1: Developing an Inventory

Quite simply, you wont know what to buy if you dont know what you own. If you dont have a current inventory of your service, (and therefore need to discover what your enterprise purchases), there are a number of tools you can utilize to get your arms around your requirements. The telecom industry often refers to the inventory as a demand set because it provides a basis for the financial analysis of contract offers, allowing the organization to measure projected annual expenditures and savings. Invoices are one tool that can be leveraged to try and get a clear understanding of exactly what it is that you are currently purchasing. Also, most of the major providers have good reports available in their online billing and reporting sites or portals where companies can pull an aggregate view of the rate elements that an organization is currently purchasing. What is not always intuitive, however, is what reports should be pulled in order to get the type of detail required to break out the service usage by rate component. The information is available; its just a matter of figuring out how to get to it! Since the portals vary by provider, we would suggest utilizing the help or support functions if necessary to understand how to customize the requested reports. Another tool that can be leveraged as an inventory check point is the service providers contract compliance report. This is a report that that service providers should be providing to customers each month, although the reality is that most enterprise clients are fortunate if they get a couple of these reports per year The providers isnt required to supply this report, but best practice is to demand the report (a good

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negotiator will put the provision in a Stewardship Agreement.) In addition to showing how your organization is tracking on contractual commitments, the report provides a breakdown of spend by service, thereby helping to identify any gaps in inventory and where they might be. An alternate way to tackle building an inventory is to consider having a services audit performed by a third party vendor. There are many companies that will perform the audit for no fee, unless they recover credits on your behalf, in which case they will take a percentage of the savings. This is a low risk, low cost way of having an accurate inventory performed.

Local Services Local services can be one of the toughest areas to build a demand set for; decision making is often decentralized and bills are typically not detailed. When details are available, there are literally thousands of Universal Service Order Codes (USOCs) referenced by the Regional Bell Operating Companies (RBOCs). One of the creative ways clients can get a complete inventory of their local services is by having a Competitive Local Exchange Carrier (CLEC), or a reseller compete against the incumbent for the business. One advantage of using a CLEC or reseller is their ability to provide consolidated invoice and inventory reports. It may seem like an extreme step to consider an alternate provider in order to get an inventory, but there are usually material savings to be had, and most resellers offer zero commitment agreements that allow companies to switch back if they are unhappy with the service.

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Once the current demand set is built, its time to look into the futureat least for the length of term of the average telecom agreement (typically three years). If there are any technology migrations on the horizon, different scenarios must be modeled in order to understand how that will impact your usage profile and spend. Organizations should also be looking at whats going on within their specific industry and examining anything you know thats particular to your company. If you are anticipating layoffs, for instance, your agreement needs to provide more flexibility than an enterprise that is anticipating record growth. Even things like implementing new policies to manage costs in areas where there might be abuse can have a significant impact on usage and should be factored into the demand set.

Step 2: Deciding on a Strategy

It is best practice for an organizations project management team to agree on one strategy before beginning the negotiations process. One of the first steps is to identify the objectives. The primary goal for most enterprises is to reduce prices, but there might be additional target areas where youd like to see service improvement as well. For instance, if you currently have multiple vendors providing services, the organization might be looking to consolidate to gain efficiencies in the management of providers. There might also be areas to address around stewardship in terms of account support, reporting, or billing. It is best practice to identify all objectives and present them to the providers up front so that the deals can be quoted on a holistic cost basis. Once objectives have been solidified, the second major decision point is whether to engage in

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an RFP or renegotiate with a current provider. Some organizations are predisposed to wait until they can competitively bid their services out based on internal policies, etc. The reality is that over 80 percent of RFPs go to incumbents, based on the inherent advantage that the current provider has in being able to deliver savings more quickly, as well as the investment required to transition providers. Organizations should always be aware of how financials look on a pro forma over time. For example, if you renegotiate with your current provider at mid-term (say 18 months into a three year term) and realize a 10 percent savings, you will have 18 months to take advantage of those cost reductions; that would have to be balanced against what could be achieved in an RFP. If the RFP results in a migration to another providerand since most transitions take three months or more to completeit may be more than 18 months before the savings is realized. Again, an analysis of the different scenarios over time is critical. Engaging an experienced, carrier agnostic consultant with their own intellectual property in the renegotiation process enables organizations to compare their results against what similar clients are achieving in like RFPs, or what accepting a mid-term offer might entail in terms of cost. If the consultant is good, they should be able to secure very close to the RFP-like results. Some enterprises, when they are less than a year away from fulfilling their contractual obligations, decide to combine the RFP and renegotiation strategies. They take an offer to their current provider for first right of refusal, with the message that if the offer isnt competitive and representative of what could be achieved with an RFP process, the job will go to bid. The providers are motivated to avoid the time and

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resource expenditure of going through the RFP process. As mentioned above, there is always the opportunity to engage an objective third party to verify the results.

What is the Providers Incentive? A third area that should be considered when developing a negotiations strategy is what incentive there is for the providers to come to the table, whether its to secure additional business or protect the business they currently have. Clearly, the ability to go to RFP provides built-in leverage for the enterprise, but a well-negotiated agreement will include a rate review clause that can also provide inherent leverage. Typically these clauses provide for an annual or mid-term review. Best practice is to have any rate review clause include a penalty stating that if an agreement with the provider is not reached in a reasonable period of time (say 30 to 60 days), the organization has the ability to reduce their commitment by a material percentage (ideally 25 percent or greater). This enables you to move a portion of the business to another provider right away. If you follow best practice guidelines and do not commit more than 70 percent of your business to any one provider, you could potentially move almost half of your revenue to another supplier without penalty. Other sources of incentive for the providers include new applications and service orders (either a brand new service or a service previously provided by a competitor). Most account representatives are compensated based on maintaining and growing annual revenue; additional expenditures help them make their quotas. Another incentive for providers (beyond revenue objectives) is to increase the length of term of the agreement and/or increase the amount of committed business. It

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is fairly typical for a renegotiation proposal to include an extension in term and, often an adjustment in the commitment level as well. Another effective strategy is to identify any services that could readily be migrated from one provider to another and use this as a carrot to get a non-incumbent provider excited about the opportunity for your business. In truth, even a relatively small amount of business or revenue can generate a considerable amount of competitive interest. A non-incumbent provider may move aggressively to secure a small amount of business as a foot in the door with the goal of building a relationship with your enterprise to better position themselves for the next large-scale competitive sourcing event.

Step 3: Presenting Requirements or Issuing an RFP

RFP Situations The first step in the RFP process is selecting your bidders. Remember that it is in your best interest to look beyond the first tier suppliers. Although it is not recommended to invite a provider to bid for your services if you cant realistically consider doing business with them, there are certain second tier providers that get very high grades from enterprise clients in terms of service and support. Some well-known second tier providers to consider for your next RFP might include: Global Crossing Level 3

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Paetec Qwest (especially national clients with data services needs) BT (would require international component of significant size) Cable and Wireless (partners with Sprint domestically)

It is considered best practice to issue detailed pricing worksheets to all bidders. Restricting the bidders from making any changes to the spreadsheet beyond filling in the blanks will force respondents to answer in the same consistent manner, saving time in analyzing the financials. If youre requiring custom SLAs, do not let the providers write the terms; even just one exception can render SLAs meaningless. It is recommended you issue a detailed script of what providers are required to agree to. Every telecom RFP should include requirements for terms and conditions. At a minimum, the initial RFP should cover basics including commitment levels and required terms. Laying out a complete list of term requirements in the initial document to create a holistic view of the deal is recommended in order to preserve your rights around service support and billing while minimizing risk. Creative solutions are encouraged, but in order to avoid potential confusion bidders should be directed to submit responses to the current design as outlined in the RFP. Any additional creative proposals can be submitted in the appendices and highlighted in the executive summary. Its also recommended that you require draft agreements be submitted along with the initial RFP responses. This will speed the process as you move to agreement with

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the successful bidders. (It takes less time for the providers to modify an existing agreement than to create a document from scratch.) Its generally considered very effective to hold a bidders conference a few days after the RFP is released; this gives bidders an opportunity to ask questions while you highlight areas of the RFP that are particularly important. Inevitably, the bidders will request additional face time; we recommend stating that additional time has to be earned. The first hurdle they must clear is to have a competitive response to the RFP. This practice will avoid wasting time with an unviable vendor that cant compete from a financial perspective.

Renegotiations Similar to the way you would prepare for an RFP, a renegotiation also requires you to prepare a detailed demand set. Think of it as a way of checking the math that comes with the providers proposal. Its also a key to being able to compare proposed commitment levels to your run rate (once youve taken into account any anticipated changes to make it representative for future term.) Presenting contract requirements in a face-to-face meeting with the provider is one effective approach. The provider is informed beforehand that no response is required of them in that initial meeting, but what is required is an appropriate level of representation including someone from pricing or offer development, as well as executives from the sales or marketing side. The attendance of these higher level provider representatives will help insure that your deal receives an appropriate level of focus and attention with sufficient resources assigned to the effort. The requirements to be presented should include targets for all relevant rate elements as well as
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stewardship and/or term and condition requirements if there are areas where changes are required. Being candid with the provider in articulating whats in it for them, is considered best practice In other words, if there is a willingness to extend a term, lay that out in the requirements presentation. Try to avoid any situation where youre asking the provider to price down a service with nothing in return. Dont forget to include the proposal time line as well as identifying a target date for an amended agreement to be signed in order for the provider to commit to supporting your timeframes.

Step 4: Analyzing Offers and Addressing Deficiencies

Both RFPs and renegotiations need to be analyzed once the offers come in. Renegotiation responses should be loaded into the demand set and compared to the current providers numbers; remember, your demand set may vary based on tweaks youve made in terms of a future view. Relative to an RFP response, organizations will want to look for anomalies as you line up the different bidders responses next to one another. Its very common for mistakes to be made, (e.g. incorrect decimals, etc.) If there is a number that doesnt make sense, follow up and verify the response with the bidder. Since you may not have a single vendor award, you will want to model the different award scenarios. The terms and conditions can also be lined up in a spreadsheet so that important elements like term requirements and commitment levels can be compared. In your review of the RFP
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documents make note of any exceptional requirements that are being made for exclusivity, or requirements for specific services awards. Once the analysis has been completed, its time to identify the deficiencies or gaps by reviewing the first round financials and any deal breaker terms and conditions. Clearly if a provider is requiring 100 percent of your business and youre contemplating a multi-vendor award, thats a deal breaker term youll need to address. You may also consider eliminating some bidders if their pricing is out of the ballpark or for being noncompliant in some material area. Requirements should be communicated back to the providers in writing so that they can be circulated internally within the provider organization as needed. It is recommended that you try to include some positive feedback along with any deficiencies so that the communication isnt overly negative. . We also suggest mentioning a few areas that you find acceptable, thereby taking them off the table.

Lather. Rinse. Repeat. Whether you are running an RFP or conducting a renegotiation, youre going to have to go through as many rounds as needed in order to reach your objectives. As you proceed through the rounds, there may be a need to reprioritize. (You may also need to weigh the cost of another month spent negotiating against any opportunity cost in unrealized savings.) When you are near the end of the negotiations and you have a short list of requirements, one tactical strategy is to say, If you comply with A, B, and C we will sign

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the agreement. That can be very effective in getting the supplier motivated and organized around meeting those last few requirements and getting to signature. Escalating unresolved issues to a higher level representative is a contract negotiations tool that should be used only when truly necessary. For instance, escalation may be warranted if you find yourself stuck in a bottleneck situation and you want to identify whether the bottleneck is on the sales or pricing side. If your account team is telling you that pricing wont approve a requested offer, its a good idea to reach out to a contact in the pricing organization for verification. If they tell you that the deal hasnt even been submitted for approval, you know your bottleneck is on the sales side. This scenario, by the way, is not unusual; calling the account team out on their misstatements will usually help move things along. In instances where pricing truly was holding up approval, weve had account teams ask for our assistance in escalating. These teams might be trying to act as your advocates internally but they need an extra push to get approval. This illustrates that escalations dont have to be adversarial. Each situation is unique, with the goal being to enable the provider to put forth the best possible offer. If there are existing relationships you should not hesitate to use them once the decision to escalate has been made. If someone is playing golf with the regional vice president, you can exert pressure from more than one direction.

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Step 5: Getting to Contract

Assuming that you are able to address any and all deficiencies successfully, the next step is to request final contract pages. Ideally your legal team has been engaged in the process early and are prepared and expecting the contracts. It is not unusual to see disagreements over the particulars of clauses such as privacy (especially Personally Identifiable Individual information or PII), intellectual property, and liability. In fact, deals can stall for months over these types of issues, resulting in millions of dollars in lost savings. If overly protracted negotiations around the specifics of legal language become an issue, consider reaching out to a third party for advice, ideally someone with an extensive intellectual property library on how providers have compromised to meet enterprise requirements on legal clauses in telecom agreements. Access to this insider knowledge of how to break through a stalemate can be very instrumental in moving a deal toward closure. Expect that there will be errors in the initial iteration of the contract as you move toward signature-ready documents. Its reasonable to allow two weeks after an initial request to receive correct final documents that are reflective of everything youve agreed upon. Be aware of provider cutoffs for effective dates (signature deadlines vary by provider.) For example, if you get your deal countersigned by AT&T after the tenth of the month, you will have to wait a full additional month for the voice rates to be effective. Make sure you know the critical dates so you can plan accordingly and avoid losing out on savings.

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Its also a good idea to know the availability of executives needed to sign the deal. Its frustrating to have things lined up to make a deadline only to discover the guy who needs to sign just left on vacation. Finally, when going through the final signature process, be sure to get the providers commitment to review the first invoices to verify that the organization is receiving the negotiated rates.

Conclusion

While clearly there is much more to negotiating telecommunications agreements than five simple steps, the objective here was to provide tips in each of the five areas discussed that will better prepare organizations to move expeditiously through the negotiations process.

About the Author

Suzanne Rosato is a veteran of more than 20 years in the information technology and communications industries. Suzanne has worked for leading telecom expense management service providers and the nations largest communications carriers as well, and her extensive experience has enabled her to develop a thorough understanding of economic impacts of various technologies and the procurement process for securing those technologies.

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Suzanne has earned a B.S. from Clarkson University, an M.B.A. from Rensselear Polytechnic Institute, and a Juris Doctorate from the University Of Connecticut School Of Law and has been admitted to practice law in Connecticut and New York State.

About Tangoe
For more information on any of the topics mentioned in this white paper, please contact Tangoe. Our Strategic Consulting team will be happy to assess your current situation and provide recommendations at no cost. Tangoe's Strategic Consulting services combine decades of collective consulting and billing analysis expertise with an extensive technology-driven knowledgebase of contract rates and terms to negotiate world-class telecom contracts and terms and conditions that deliver market floor rates. Contact us to learn how Tangoe can assist you in best managing your existing and pending carrier contracts.

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