The Hidden Cost of Loyalty
In all service relationships, the quality of those relationships will have a significant and direct bearing on the perceived quality and value of the service being purchased. All credible suppliers take great care and place much emphasis on building and maintaining great relationships with their customers. The supplier goal is to build loyalty which serves as an excellent defense against the encroachments of competitors. At the end of the day, people like to do business with people they like and have come to know. The telecommunication carriers have invested heavily in building loyalty in their enterprise channels which have traditionally been one of their most profitable market segments. In telecom sourcing, relationships and the underlying loyalty is a major obstacle that must be overcome in order to take away market share and grow.
Understanding this dynamic is important for any enterprise seeking to attain or maintain a market leading contract.
Who Benefits?
The financial benefits of loyalty primarily benefit the supplier or in this case the underlying carrier. This is not to dismiss the value of quality relationships and the benefit that is derived from them; but clearly on financial issues the supplier alone benefits from loyalty. Non-financial benefits that typically accrue to the enterprise can include: 1) enhanced responsiveness to problems, 2) proactive oversight on new installs, 3) sheer enjoyment of working together, and 4) access to major social and networking events such as golf tournaments and sporting events. Notice that getting better prices or getting better contract terms are not on the list of enterprise benefits. The bottom line is that loyalty financially benefits the carrier and results in the enterprise paying higher rates than if there was no such loyalty. While this may go against conventional wisdom, it is indeed a universal truth.
I believe this is wrong and that loyalty should truly benefit the buyer financially. I have personally got ticked off in the past year when I realized my personal loyalty in buying things such as Internet services, cable TV and wirelesss rate plans, was costing me money. New customers were being offered much better rates and service packages than what long term loyal customers were getting. I was mad and took action dropping some vendors and getting sweeter deals from suppliers. These same dynamics of loyalty apply across all market segments and especially when the stakes are high like in enterprise markets.
Carrier Mindset
Great relationships can and should be established however business should be earned on its own merits. When outside influences are brought in, and one begins rationalizing loyalty into one’s sourcing initiatives, one is walking a slippery slope. Because of great “relationships” in my experience, the enterprise team believed they were getting a very good deal and getting special treatment. In most cases I have been involved with this was rarely the case. What I saw was the carrier charging more than the best deals they had freely offered for comparably sized customers, especially when those other customers were not currently their customers. When I ran carrier pricing for two of the largest national US carriers, the first question we would always want to know is “how is the relationship”. We asked this question because if the answer was very good or strong, we knew we did not have to lead with our very best pricing. We would always have another chance if we priced too high.
Another factor used to make determinations on how aggressive to price would be ascertaining what the cost of change was for the customer to move to a competitor. The costs of change can include capital, manpower resources, duplicate network costs, and higher prices in the interim; and carriers will attempt to estimate this and use it to justify their pricing response if their loyal customer complains. It is a fact of life that incumbent carriers like to point out the cost of change whenever they are challenged on their seeming non-competitiveness on price. The good relationship adds another layer of comfort to the incumbent carrier and together leads to suboptimal responses to enterprise renegotiation and/or formal RFP initiatives.
The challenge for the enterprise is to get the carrier to understand their mindset. In the enterprise mindset, neither costs of change or loyalty should be used against them. Customers expect their loyalty to be amply rewarded.
Recommendations for the Enterprise
Few enterprises want to change providers and this is especially true if there is loyalty established. But I believe these preferences and in some cases predetermined outcomes need to be set aside and totally removed from the enterprise mindset during competitive procurements or renegotiation’s with incumbents. If one shuts out true competition, not only will they potentially miss out on a pioneering offer from a hungry non-incumbent, but they will lull the incumbent into a sense of complacency and comfort regarding what they need to do to retain the existing business. We recommend the enterprise live by the adage: Relationships can be built but business must be earned!
Specific tactics TelAuthority highly recommends include:
1. Competitively bid services, even informally every time. You just don’t know what you don’t know. This market shifts all the time and what you believe is a great price may be yesterday’s news. You just may be surprised at what happens and the injection of competition will keep your incumbent honest in the process. If properly coached they will have a higher bar to clear to re-earn the business but the enterprise must make it clear they are willing to move if financial logic compels them.
2. Engage true third party experts to help speed you through the formalities of competitive bidding. Left to the carrier devices, this process can take many months longer than it need to and time is indeed money when prices continue to fall. True experts will also provide validation and an unbiased expertise into the negotiations and analysis. Know what you are getting and how it compares to the best in the industry. Make informed decisions knowing your options and understanding the market and how your new deal stacks up.
3. Be indignant anytime an incumbent carrier plays the cost of change card as their rationale for submitting an offer that is not competitive with the other providers that want your business. If a carrier plays this card, they are admitting that your continued loyalty will costs you in the form of higher rates. Just say no.
Bottom Line
An enterprise should absolutely seek to have the highest quality and best relationships with their telecom suppliers. This can be accomplished but does not need to come with the hidden cost of paying prices that do not reflect the leading edge of the market. Blind loyalty can indeed cost an enterprise millions of dollars per year. Be loyal but not blindly loyal, there is a difference. One should never have to apologize for demanding a market leading contract especially given these dire economic times. Having a great relationship and achieving a world class contractual outcome do not have to be mutually exclusive outcomes.
TelAuthority is the trusted advisor and acknowledged industry expert to assist large enterprises in navigating this complex and challenging process. Please contact us for more information or to discuss the unique challenges faced by your organization.
Written By: Pete Wilson, CEO, TelAuthority, LLC
Evolution of Competition
Historically there has been tremendous competition in the telecommunication services industry as evidenced by a consistent 25 year pattern of falling prices. Falling telecom prices has driven usage validating the economic theory called the elasticity of demand. With lower prices people/businesses made more phone calls, connected more sites to their network, increased their data bandwidth and invested in mobility solutions and advanced devices. These actions in turn brought more people to the Internet and wireless connectivity which beget even more demand for telecom services. All I can say is Wow when I reflect for a moment how competition in telecom has revolutionized the way we live, work and play.
I remember pre-divestiture of the Bell Monopoly when a great deal on long distance was $.50 per minute in 1983 dollars. If you were a huge Fortune 50 enterprise, the large carrier I worked for at that time would cut you a real deal at $.39 per minute. Adjust these prices for inflation into 2009 dollars and the great deal of 1983 would be $.75 per minute today! The data side of the telecom industry is just as extreme. Just 10 years ago, a T1 point to point circuit from New York to LA could easily cost $15,000 per month. Today that kind of connectivity and bandwidth can be had for hundreds of dollars and with a lot more functionality and inherent value. Indeed the breakup of MA BELL ushered into being real competition that has led to dramatic quality of life and productivity enhancements that have revolutionized the world. I am proud to have been in this industry and feel privileged to have a small role in this revolution.
The newest frontier of competition has been wireless; which has also been transformed in this decade. Remember being jealous of your neighbor who had the clunky $750 contraption installed in their car? Now everyone has a cell phone and wireless traffic has surpassed that of wireline in many countries around the world. The legacy RBOC entities (AT&T, Verizon and Qwest) are now fast losing residential lines as people are accustomed to using their mobile phones instead. An entire generation has now been raised without believing in or depending upon a landline connection to stay connected. With the mobility explosion and linkage to an ever evolving Internet, the wireless industry has been turned upside down. Who would have guessed all of this 20 years ago?
But what about competition today?
The collapse of legacy wireline carriers earlier in this decade and the consolidation into a handful has led many to falsely believe that competition is no longer alive and well. While granted there is less competition, Enterprises that believe this will get poor results in their sourcing initiative to validate their false belief. In the past, enterprises reaped benefits by sitting back and letting the competition come to them. The best prices and the pioneering contract terms, and support provisions have never been freely offered, however, it today’s climate, it is paramount that the enterprise seize the initiative and take their needs and demands to the suppliers. The days of carriers throwing money at customers to win business without being coached, enticed or motivated are over. World class deals are secured only by recognizing the competitive forces that exists in the market and executing a sourcing strategy that leverages these dynamics. Competition remains alive and well in the telecommunications industry but the buyer bears a much bigger burden in terms of leadership of the process.
Competition comes in several forms. The big stalwarts AT&T and Verizon still seek growth, especially for enterprise segment. Negotiation leverage played correctly works well as it just takes two to tango yet this is more than a two horse race. There remain several viable players, Sprint and Qwest most notably yet many other credible suppliers that focus on certain segments of the industry like local, audio conferencing, VOIP, MPLS and plain vanilla long distance. Few enterprises should put all their eggs in one basket. Utilizing multiple suppliers provides diversity but an added benefit is a readymade source of leverage when it comes time to resource your telecom services. Capable, strong providers remain to compete and offer competitive solutions for enterprises that understand the market and these supplier capabilities. As budgets get tightened in this unprecedented financial climate, enterprises must adapt to the changed competitive environment and take matters into their own hands. Savings and enhanced productivity and service value is there for the taking for those that understand the new market dynamics.
Wireless remains a very competitive segment with the two dominant players AT&T and Verizon having to remain sharp and focused on price, service and support to fend off the inroads of the secondary players including Sprint and T-Mobile and to defend their turf against the other. All these carriers recognize that to take market share away, they will need to overcome the obstacles of new equipment/devices and ensuring an orderly and seamless porting of existing wireless phone numbers. Incentives, performance guarantees, dedicated personnel, equipment rebates, employee benefit and other creative programs are available and all negotiable items. Do not let a limited frame of reference about these incentives lead to missed opportunity. Wireless prices are coming down regardless of what your sales rep may be telling you.
Beyond negotiating price structure and price level, these other incentives are infrequently pursued and rarely freely offered by the suppliers. Proper positioning, coaching and application of competitive leverage is necessary to drive the carrier behavior that results in a world class outcome. Incumbents should re-earn the business on the merits of their total program offer and fear of change should not be allowed to restrict enterprise sourcing actions.
Conclusion
Telecommunication industry competition has adapted from the heydays of the past yet remains alive and well. No enterprise should roll over and play dead; in fact the economic collapse has created new opportunities that go against conventional wisdom. Ignore these opportunities at your own financial peril. Enterprises need seize the initiative and take the action and their demands directly to the carriers. Based on my personal broad exposure to the industy, every time a new precedent setting price was established within the industry, competition was being leveraged 100% of the time. Pioneering price new price points don’t just show up on their own, they must be elicited via competitive leverage.
Rather than lowering expectations in sourcing and negotiations, I would encourage enterprises teams to raise them. The key to any negotiations is defining leverage and the key to defining leverage is knowing all your competitive options and fully engaging the alternatives into your evaluation and decision making process. If there was one takeaway from this blog post besides understanding that competition remains strong and healthy it would be this:
REMEMBER: YOU HAVE MORE LEVERAGE THAN YOU THINK
TelAuthority is the industry authority for the sourcing, procurement and negotiation of telecommunications contracts. We know this industry well and have key relationships with all major suppliers. We would love to tell you more and look forward to that opportunity.
Written By: Pete Wilson