When you begin looking at a new deal, one of the areas of concern is usually the revenue or line commitment.  You know that your business is changing all the time.  Are you going to leave money on the table and sign a deal with a lower commitment and lose out on savings or are you going to lock into a higher commitment and risk a shortfall that you will need to pay against?

Most people are petrified of committing to a high number and then paying the “penalty fees”.   Are they really penalties at all?  That is a discussion for another day.  Today though, we are going to look at a technique that can be used to maximize your savings while limiting your exposure.

A term commitment, especially a term revenue commitment (TRC), is a great way to structure the commitment as opposed to minimum annual revenue commitments (MARC).  Say you are spending about $50M (before discounts, which is often how commitments are calculated) annually with your service provider.  Your vendor is going to push to get at least 80% of that committed.  With MARC, you must spend $40M each year.   If you continue spending at the same rate every month, you will meet your commitment in the final year of the contract (let’s say it is a 3-year contact), in month 10 – or the 34th month of the deal.  That doesn’t leave you much time to migrate services.  Your vendor knows this and when it comes time to renegotiate, you will have very little leverage.

A better structure is a TRC.  So instead, say you agree to a 3-year, $120M TRC.  This accomplishes several things in your favor:

1. It highlights the total value of the contract to your account team.  You want them eager to win your business.  They will push the bean counters behind the scene to get the deal done; not understanding the value of the contract may be lower.
2. It allows you to meet your commitment in the 29th month of the deal, giving you the flexibility to migrate to another carrier, renegotiate earlier, or just sit tight for a few extra months.
3. It pushes any possible penalty payments to the end of the contract.  If you suddenly found yourself spending $30< a year, you would owe the carrier $10M at the end of year 1, year 2 and year 3.  With a Term commitment you push the penalty out by 1-2 years, defraying the cost slightly with the time value.
4. It makes you less vulnerable to change.  Having a big year doesn’t help you in other years unless you have a TRC.
5. You could potentially commit to a higher value.  Depending on the confidence you have in your analysis, processes, and business stability you could agree to a $130M TRC, or even higher.  The more you can commit to, the more you r vendor is going to be increase discounts.  Having experts like A&I help you will make that option more attractive.

One final word, Every vendor will tell you they cannot do this. Simply say, “Fair enough, we’ll eliminate you from consideration”, and they will suddenly be able to do it. This is typically because your account reps haven’t done deals like this, and don’t want to put in the extra effort.  Once they realize that they will conform or lose, they will get it done.  We use this technique for our clients all the time and have negotiated many, many term revenue commitments.