Enterprises Have Bargaining Power With Carriers

Companies are advised to take stock of their networks when negotiating with their telecommunications provider.

If negotiating with your telecommunications provider has become more like dealing with a used-car salesman, the time is right to take a new look at the leverage the customer wields in todays networking environment, according to experts in hammering out telecom deals.

While larger enterprises are apt to wield more power at the outset, size alone does not guarantee the best contract, and smaller businesses can develop leverage if they know how the system works. Understanding the discrepancy between carriers words and marketplace realities is vital. And while information is available, carriers—whose industry was a heavily regulated monopoly not that long ago—still keep details close to the vest, experts say. "Telecom carriers havent adapted to the fact that theres more transparency in the process now," said Lewis Love, senior vice president at Washington Mutual Inc., in Seattle. "Carriers are masters at managing what they have to disclose."

Federal regulations require carriers to publish the rates they offer, but locating and deciphering that data can be difficult. Love recommends hiring a specialist to help negotiate the finer points of telephone tariffs and acceptable-use policies.

Washington attorney Hank Levine, who has spent the last 10 years negotiating telecommunications contracts for large enterprises, describes the contracting dance more bluntly. "Carriers lie like addicts in withdrawal," said Levine, a partner in the firm of Levine, Blaszak, Block & Boothby LLP.

Its not that telecom carriers are evil, he said, its just that they are highly motivated to clinch large contracts, and enterprises often misjudge their own bargaining power. So before entering into the next round of negotiations with a service provider, take careful stock of the companys leverage, beginning with knowing everything there is to know about the companys network.

At Washington Mutual, before entering contract negotiations, the company examines the worst-case networking scenario and how the network can be designed to remain operational in a crisis, Love said. "We give ourselves the ability to take on more [carrierlike responsibilities] when we have to," he said. "We can do everything except lay cable."

Enterprises must understand the interplay among rates, traffic commitment and contract length and realize carriers portrayal of the interplay isnt always in their best interest. "Every year, carriers say this is never going to happen again—youre never going to see prices this low again," said James Edwards, a division executive for Strategic Sourcing at Washington Mutual. "Prices are still going down. There are a lot of new entrants still entering."

There is no correlation between rates and the volume of traffic an enterprise commits to. A carrier serving as a lead provider will seek the highest-possible minimum traffic commitment, but enterprises should resist the pressure. Five or so years ago, minimum commitments typically meant 80 percent of the traffic; but the minimum has fallen steadily, and today the best contracts do not exceed 60 percent, according to Edwards.

There may be a correlation between contract duration and rates at the time a contract is sealed, but a lengthy contract can mean paying more in the long run. While there is no one-size-fits-all perfect contract term, the key is to avoid getting locked into a long-term contract.

Carrier translator

Experts say understanding what telecom service providers really mean is crucial to getting a good deal

What a carrier says

Marketplace translation

"Prices will never again be this low."

"The capacity glut ensures continued falling rates for some time to come."

"A longer term will give you lower rates."

"A longer term wil enusre that you cant force us to lower your rates when they fall."

"This is our best and final offer."

"Youre beginning to approach a fair deal, and were getting nervous."

"You need to put yourself in a position where you can take advantage of a fall in prices," Edwards said, adding that it is advantageous—but not always easy—to know the rates and terms similarly situated enterprises are getting. "Carriers are very good at hiding the deals they give other companies," he said.

The easiest way to squander the enterprise leverage, according to Levine, is to get locked into a "special," long-term relationship. A two-year term is typical in todays market, and longer terms should be avoided, in Levines opinion. In fact, it can cost the enterprise more if it is considered "special."

"If your president is on their board and their president is on your board, that will cost you another 10 percent," Levine said. "If youre not going anywhere, theyre not doing anything for you."

The best time to negotiate a contract is six months to a year before the existing contract is set to expire, Levine said. After that, there isnt enough time to hold out for the best deal, but before the one-year-to-go mark, carriers have little incentive to bargain.

In todays network environment, maintaining carrier diversity is not only a bargaining chip but also a key to data reliability, even though carriers may say otherwise, Levine said. Milestone events in the telecom industry over the last couple of years (for example, the WorldCom Inc. case) have changed the dynamics of contract negotiating, and now enterprises factor in the risk of a carrier filing for Chapter 11 protection.

Officials from all the carriers contacted for this story declined to comment.