Two Heads Aren’t Better Than One
One of the most common missed opportunities in negotiations is when enterprises piecemeal their efforts for the book of business they purchase from a given supplier. For example an enterprise may buy local, long distance, data and wireless services from Verizon and in many cases there will be separate contracts in place for each class of service, with differing terms and usually service specific commitments.
The problem with this piecemeal approach is that the enterprise is playing into the hands of the carrier bureaucracy and product fiefdoms. The different heads of these product groups do not necessarily think alike and have direct influence in terms of what is offered in custom negotiations with enterprise accounts. This is a big reason why the contracting and negotiation of telecom services remains separated with different contract forms and seemingly different rules of logic.
Many savvy enterprises have attempted to have their book of business viewed and acted on holistically by the large carriers. Navigating this internal minefield of fiefdoms and complexity can be very frustrating indeed but it can be done. Local account teams rarely possess the internal clout to accomplish the holistic handling and many enterprises have abandoned this pursuit and have awarded their services and contracted with the carriers on a piecemealed basis. Based upon my experience the downside of piecemealed telecom contracts include the following:
Negative Impacts of Piecemealed Sourcing Efforts
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Higher prices for each suite of services and overall
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Loss of contract flexibility via multiple commitments
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Greater risk of internal business changes
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Receiving less attention and respect from the supplier
Piecemeal approaches to telecom sourcing will almost always under-perform a holistic approach. By shopping and negotiating holistically, an enterprise’ total telecom spend or even the potential spend is the prize that garners maximum carrier attention. The issue of being piece-mealed has become more acute over the past several years with the consolidation of carriers and the integration of the acquired entities. For example, a few years back BellSouth, SBC, Cingular and AT&T were all distinct entities that primarily addressed just one segment of an enterprise’s needs. Since SBC acquired these entities and renamed the whole of the new entity AT&T, all of the services (local, IXC and wireless) and territory covered by these four companies are now rolled into one entity yet the one entity has multiple heads and they are not always connected. The same dynamic applies to Verizon and other carriers that service one or more of the industry product segments.
Because AT&T and Verizon provide the bulk of services to the enterprise market, this posts primarily applies to them, but understand the same issues apply to other carriers such as Sprint and Qwest. Carriers create the fiefdoms on purpose – it is in their regulated carrier DNA so to speak. Despite carrier integration with the non-regulated IXC and wireless segments ; the RBOC mentality of fiefdoms is dying a very slow death. The other driver is human nature and the resulting pride and ego’s the various product groups possess inside their carrier organizations. These different fiefdoms have real clout and unless negotiations occur high enough up in the carrier organization, bridging the gaps between fiefdoms can be quite challenging. If the fiefdoms are not brought under the direction of one brain, different rules of logic and responsiveness to an enterprise demands will result. There must be executive sponsorship to bring the two heads together.
Practical Illustration
Here is an example of what this means in a practical illustration. For example, if an enterprise spends $10M per year overall with Carrier X, yet purchases only $5M per year of MPLS services and the remainder in local and wireless services; the MPLS product group views them as a $5M per year customer and will respond accordingly when approving pricing. In this illustration, the other $5M per year spent on other services from Carrier X is not even considered by the MPLS product organization. In this extreme example, the enterprise will most certainly not be given MPLS pricing that reflects the whole of a $10M relationship and the wireless/local deals will similarly be decided upon independent upon the whole of the relationship.
Because local services are still subject to some regulation it is understandable the caution carriers take to not circumvent the spirit of state regulations. Requiring separate paperwork for local services is fine but hiding behind the veil of supposed regulation in denying holistic consideration of an enterprise is wrong. Even though local services carry a regulation burden, it is no excuse for a carrier to isolate local or any product group and not view their customers in a holistic fashion. Treat me holistically with the entire package of pricing and terms and I am happy to sign separate local contracts to meet the regulatory burden but look at the whole and not the pieces when addressing my needs. Creative packaging is needed to overcome the regulatory constraints and make everyone happy. Few have the energy and know how to navigate this effectively.
AT&T vs Verizon
AT&T is further along the evolutionary curve than Verizon as it pertains to thinking with one brain. This will not happen automatically, it remains an unnatural act; so it is incumbent upon the enterprise to define their strategy in any sourcing initiative to encompass the holistic approach. Verizon on the other hand has a ways to go. They remain stuck with an RBOC mentality with wireless, local and IXC services seemingly run by three different heads that do not communicate with each other. Verizon will figure this out sooner rather than later as their competition is clearly using their weakness against them in the marketplace. Verizon claims they think holistically but their actions do not support their rhetoric.
Shopping versus Awarding Business
Shopping your business holistically is not the same as awarding your business holistically. Do not be confused by the main message in this post which is:
“Always shop holistically. Make sure all business is fully considered when any decision is made for even a portion of the business.”
This does not mean to put everything including the kitchen sink into all your sourcing, RFPs and negotiation efforts. Doing so may make the process so unwieldy that the lost time factor alone could erase any benefits of a holistic package from the carrier.
Having portions of business under different contract cycles that are not coterminous can be a good thing. If handled properly, every time any contract comes up for renewal, it provides leverage that can be used to readdress the whole relationship; not just the services in the expiring agreement. Avoiding or minimizing commitments, especially product specific commitments is a key to maintaining leverage. When product specific commitments are made, it takes away from leverage and limits the options available for renegotiation’s.
TelAuthority is the industry expert to define and execute negotiation strategies to attain market leading results. If you would like to know more or have any questions, please contact us. We look forward to hearing from you.
Written By: Pete Wilson, CEO
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