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.

Then there’s the whole network performance thing:

‘Verizon also can’t resist jabbing AT&T by asking “Why pay more for the 3G version and get 3G service on an overloaded network with limited coverage?” This bullet point, though, must have been written before the PC World article from last month was released. Much to the embarrassment of Verizon, the results from the latest carrier showdown reveal that AT&T’s network is passing with flying colors, while Big Red is showing a bit of strain under the load of Android.’

Here’s the rest: Verizon Touts Mi-Fi

Bottom line, the data thing in wireless is where the action will be and change will come – I just didn’t think we’d see it so fast. BTW – one of the comments in the first BGR piece wasn’t concerned about tiered pricing. Give it time, we’re going to see some real interesting iterations on pricing plans and there’s one thing for sure, they won’t be going down in cost. I’d jump on the Skype thing quick and encourage all my friends to do the same; the only way you’ll be able to drive your voice calls over your data plan is Skype-to-Skype. But then there’s Google Voice and they’ll be others.

Bob

Well, one place that seems to have a decent collection of both entertainment and useful information is iTunes. More recently they’ve added something I find really interesting called iTunes U. If you’re not already familiar with this, these are lectures from well-respected professors and well-known business figures speaking at some of the best schools in the U.S., even the world. It’s sort of like eavesdropping on a very expensive education. What’s really great is that it’s free.

As it relates to technology and especially to making informed decisions, we’ve provided a sample of just three that we think you should check out:

1. Decisions – Dr. Jeffrey Pfeffer’s (Stanford) lecture is titled ‘Evidence-based Decision Making’ taken from his book, Hard Facts, Dangerous Half-Truths, and Total Nonsense: Profiting from Evidence-Based Management. Dr. Pfeffer is funny, insightful, and downright entertaining as he goes through why companies make seemingly nonsensical business decisions and how that happens.

-       Following deeply held, but unfounded beliefs such as Silicon Valley companies’ unwavering decision to tie compensation to stock price despite over 200 independent studies that contradict this.

-       Executives who keep doing only what they know from their last job and invariably apply whatever they did before to their new company, even though there is no correlation or similarity.

-       The practice of casual benchmarking  - blindly copying what others are doing without thinking about why it works and under what conditions it will be successful.

2. Effective Negotiating – Margaret Neale’s (Stanford) lecture is titled ‘Winners Don’t Take All’ and along with her article Are You Giving Away the Store? Strategies for Savvy Negotiations in the Stanford Social Innovation Review, we learn a great deal about how bad deals are made. Also an entertaining and insightful discussion, Prof Neale offers stories, examples, and demonstrations of how psychology plays a role in our negotiation decisions. Some examples of her talk:

-       How AT&T purchased NCR for a stock price of over $140 when it started at $41 – with no bidders

-       A group of bankers who in a negotiating exercise in one of her lectures, ended up bidding $352 for a $20 bill.

-       Psychological keys that can predictably and dramatically alter outcomes when players are primed in the right way – either in a positive or negative way.

3. The iPhone Effect – Behind This Week’s Cover Story – Jim Ellis interviews Roben Farzad on his cover story, ‘AT&T’s iPhone Problem. NOTE: This differs from the actual story podcast that can be downloaded from BusinessWeek’s website.  While the article is extensive in its description of AT&T’s wireless network problems, the interview provides a wider perspective that is more relevant to the wireless industry in general. Some examples are:

-       The unforeseen impact of the rapid adoption by a concentrated demographic, such as young college students. Events such as college football games with audiences of 20,000-50,000 and with70% or more all simultaneously using data intensives apps at the same time, creating brand new network challenges.

-       Because of its iPhone exclusivity, AT&T was the single benefactor and lightning rod for criticism on poor data network performance. Farzad, rightly points out with the android and other such platforms, the smartphone’s data consumption will be an issue for the entire industry.

-       Farzad offers a balanced assessment of why wireless networks are and always will be different from landline ones through new applications, rapid growth, and highly coveted devices – all which drive up demand in an ‘all you can eat’ environment.

Links:

You’ll find both Evidence-based Decision Making and Winners Don’t Take All here, then choose to enter through iTunes U. Once in, on left, under Categories, choose Business, then the blue Business Management thumbnail. Open that and you’ll find both lectures.

Here’s the BusinessWeek interview, the date is 2/4/10.

About the authors:

Dr. Pfeffer

Prof. Neale

Robed Farzad