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.

Many contracts have automatic renewals or specific procedures that must be followed to prevent auto renewal.  Some take it for granted that dates negotiated on their last RFP made it into the contract, this is often not so.  Always check your contracts and know the procedures, dates, and revenue commitments agreed upon.

Some jump the gun and turn the incumbent provider into an enemy before knowing the particulars of how to discontinue their agreement.  It is also important to consider the time and resources necessary to move to another provider.  Know your dates and plan in advance.  Staying one step ahead of your providers will help you to negotiate the best deals.

1)      Renegotiating Contracts – If you are looking for a quick easy way to save costs in the very short term, throw yourself at the mercy of the carriers and tell them you’d like to renegotiate.  If your goal is to save money right away, and don’t care about how you will be limited in the future this can work effectively, especially if you negotiate a huge savings into the signing bonus.  Beware though, you’re obviously not negotiating from a point of strength.

2)      Using WLAN for mobile devices – I was surprised at the report that 18% of responders for a previous study had said that they are using WLANs to reduce telecom costs.  That seems like a pretty vague statement.  It seems as though they are using their own WLAN to save on mobile costs.  First, very few devices even support this, as it reduces revenue for the carriers.  Second, are these people running a secondary WLAN with limited security?  Is anyone concerned about the security of the call/data being transferred?  Who handles the request when a ticket is entered user cannot use mobile phone across WLAN?  And lastly (for now), why are people using their mobile devices to make and receive calls while they are in the office?  This seems like a complete waste of effort if your goal is saving money in the short term.

3)      Hiring a Third-Party for Contract Negotiations – As a provider of this type of service, I really cannot offer an unbiased review.  I will say this though, Procurement Departments are typically underappreciated and underequipped.  Their main goal, as it should be, is to make sure that the procurement process is conducted legally and ethically.  They may be asked to purchase office equipment one week, energy another week, and office supplies another week.  Oh, and they love working with IT and Telecom (sarcasm).  A third-party should have industry specific skills that allow them to provide input into the negotiation process and allow your staff to focus on what they do best.  One thing to watch out for in a negotiator is someone who says their strength is in sticking it to the vendor.  Negotiations are a complex interaction, but anything that can be done should be able to be expressed in words.  There is no magic to it.  Also, they should be excellent written communicators.  You can stick it to the vendor all you want, but what matters in the end is what is agreed to in a contract.  If someone cannot write intelligently, it usually means that they will be unable to spot oversights in a contract.

4)      Process Improvement – Process is essential for long-term expense management and making the most of resources.  But it really isn’t a quick-fix, and seldom yields immediate returns.  The only exception to that is if you have good MACD processes in place you may be able to find disconnects that have not stopped billing.

5)      Optimization Tools – These can provide relatively quick returns, but only in small amounts.  This is more of a long-term, process improvement.

6)      Change the culture (executive visibility/centralized inventory and usage/departmental chargebacks) – This is really the biggest short and long term opportunity for savings.  When everyone in the organization becomes involved in savings, it will happen.  Most importantly, it will happen in more areas than telecom.