Save Money on Term agreements

Term agreements
Carriers normally offer 12-, 24-, and 36-month term agreements. The longer a customer will commit to a carrier, the greater discount the carrier will offer. The combination of the term agreement and volume commitment establish the discount amount.

On national accounts, carriers will normally push for an even longer term agreement, such as 48or 60-month agreements. Ironically, the longer your term agreement, the less attention you get from your carrier. The carrier knows that they have no risk of losing your business in the short term, so they focus their attention on their more volatile customers.

Save money with term agreements
Increasing your term commitment increases your discount amount. Carriers push the 36-month term agreement because they want to count on the customer’s revenue for as long a period as possible. The pricing difference between 24and 36-month agreements is often negligible, so the customer should choose the shorter-term commitment.

Many account executives offer a new 36-month term agreement as their standard offer. If the customer is a savvy negotiator, he can often secure the same pricing on a 12-month agreement. A rule that guides many consultants is to simply reject the long-distance carrier’s first proposal. Consultants know from experience that account executives rarely offer the best pricing with their first proposal. In this way, long-distance contract negotiation differs little from the negotiation done while buying a car.

In some cases, a customer’s current long-distance contract may be amended to increase the term. In other words, another year can be added to the agreement without requiring a new contract. In most cases, however, increasing the term agreement to secure lower discounts is normally done during the initial contract negotiation.

Some small areas of the country are not yet “equal access.” That means that customers in those areas can only choose AT&T as their long-distance carrier. For example, a Midwest aluminum siding company is located in a rural area surrounded by farm fields. Its facility uses more than $5,000 per month in long distance, but the company can only use AT&T. None of the other carriers have built a network out to this remote area. This business might as well sign the maximum term agreement available because it has no other choice of carrier. At least with a long-term agreement, it can secure the lowest rates available through AT&T.

A business that receives specialized services from one carrier that cannot be duplicated by another carrier should also sign a long-term agreement with its carrier. An oil prospecting business located in Texas spends more than $10,000 per month in long distance. Most of the billing is from calls made by field representatives who are in remote areas of the Middle East. The field representatives use calling cards for their calls. The telecommunications infrastructure is underdeveloped in the oilfields of the Middle East, and only AT&T can satisfactorily provide this service.

Other carriers would like to earn the company’s business, but the company cannot afford the risks associated with trying a new carrier. This business has no reason to not sign a long-term agreement with its current carrier.

Save money by avoiding shortfall penalties

If you are in a shortfall situation, you should contact your carrier immediately. Shortfall revenue is gladly accepted by carriers, but if the customer asks the carrier for relief, the carrier will normally negotiate an alternative. The key is to proactively address the situation before the shortfall charge is billed. The volume commitment can normally be reduced to the next lower level without having to sign a whole new agreement. Some of the discounts may be forfeited, however.

If the shortfall amount has already been billed, it is difficult for the carrier to simply waive the charges and reduce the volume commitment. Usually, the carrier will only waive the billed shortfall if the customer is willing to sign a new agreement with a new term commitment. I have seen customers in their last few months of a 3-year contract experience a shortfall and the only cost-effective way to avoid paying the shortfall is by signing a new 3-year contract. However, in this situation, the customer has little leverage and ends up paying high rates.

Contract value
Contract value is how carriers calculate how much money each customer is worth. Contract value is calculated by multiplying your monthly volume commitment by the number of months remaining on your term. For example, a customer at the beginning of a $1,000 per month, 12-month agreement has a contract value of $12,000. The same customer 10 months later is only worth $2,000 to the carrier. By studying the contract value of the entire customer base, long-distance company financial analysts can predict future revenues.

A customer in a shortfall situation should be aware that his carrier uses the contract value principle to guide him during negotiations. A wise customer considers this same principle when negotiating with her carrier. To clear up a shortfall, your carrier will always require you to increase your contract value. So a customer facing a $10,000 shortfall penalty must sign a new contract that promises the carrier at least $10,000 in future revenue.

Term agreements
Carriers normally offer 12-, 24-, and 36-month term agreements. The longer a customer will commit to a carrier, the greater discount the carrier will offer. The combination of the term agreement and volume commitment establish the discount amount. Table 13.1 illustrates how a typical long-distance carrier structures its discounts.

On national accounts, carriers will normally push for an even longer term agreement, such as 48or 60-month agreements. Ironically, the longer your term agreement, the less attention you get from your carrier. The carrier knows that they have no risk of losing your business in the short term, so they focus their attention on their more volatile customers.

Long-distance contract discounts

Long-distance rates are determined by applying a discount to the gross rate. The discount amount and the way it is applied differ between carriers. Each carrier offers multiple rate plans with varying discounts. Discount amounts even vary from one customer to the next. Most customers are content with their current rates until they become aware that lower pricing is available. Long-distance profit margins are high, which leaves plenty of room for customers to negotiate.

Volume and term commitments
The main factors that determine customers’ discount amounts are the volume and term commitments in their long-distance contract. In return for the customer’s promise to spend a certain amount for an extended period of time, the carrier offers a discount. The greater the volume and the longer the time, the greater the discount. Table 1 shows a typical discount structure used by long-distance carriers.

Table 1: Typical Long-Distance Contract Discount Structure

Most volume agreements specify the amount of net dollars spent each month. Net dollars are the actual dollars spent, not the prediscounted gross amount. AT&T’s Uniplan contracts calculate the volume using gross dollars on a monthly basis. Some volume plans are calculated annually. It is very important for customers to know if their volume commitment is net or gross and if the volume is calculated monthly or annually.

One-rate discounts
As the market becomes more competitive, carriers want their discount structures to be less complex so they can more efficiently set up new accounts. They also want potential customers to be able to easily compare their offer with other offers. That is why many long-distance companies are switching to one-rate billing with a level discount amount for all services, such as 30% off long-distance, paging, and mobile phones. If a carrier is trying to win a company’s long-distance business, the proposal is normally clear and easy to follow. The phone bills, however, are not as easy to understand.

Save money with volume agreements
A simple way to reduce your long-distance bill is to increase your volume commitment, which will result in a greater discount amount. Most businesses wisely undercommit to avoid a shortfall penalty, but if you have extra volume, you should consider increasing your volume commitment level.

Your carrier will prefer that you sign a new contract with the increased discount, but you should first press the carrier to modify your existing agreement. If the carrier is inflexible, and you are not comfortable with a new agreement, you can move your “overflow” traffic to another carrier with lower rates. This will definitely get your carrier’s attention. Many businesses use multiple carriers so their carriers never take them for granted. It is amazing how the level of customer service increases when a customer uses more than one carrier.

Save money with automatic discount upgrades
In many of its contracts, Qwest has a built-in clause to automatically increase a customer’s discount if its volume hits the next highest level. For example, a small tax accounting firm committed to $2,000 per month with Qwest and received a 35% discount. From January through April, the firm’s call volume doubled. In April, the bill passed the $4,000 mark, which is the next higher volume commitment level. Qwest automatically increased the discount to 40% for that month only. In May, the bill volume decreased again and the discount was back to 35%.

When is the true-up?
It is vital to understand how the actual long-distance usage will be reconciled against the contract’s volume agreement. Long-distance accounts experience a true-up either monthly or annually. With a monthly true-up, the customer is required to bill at least his volume commitment each month. If he falls short, the carrier will add the difference to the bill. Annual commitments true-up the account at the end of the contract year. Figure 2 shows an example of a monthly true-up from a Telephone Company D bill.

Figure 2: Sample of Telephone Company D’s monthly true-up bill.

This concept of the volume commitment true-up procedure is best illustrated with an example. Two brothers, Terry and Tony, each own their own summer resort. The business is seasonal; they rarely use the phone in winter. In the slow months, their long-distance billing is only $500 per month, while in the busy months, their billing rises to $1,500 per month. Table 2 shows a comparison of the billing for both brothers.

Table 2: Annual Versus Monthly Commitments

In January, Terry signs a new long-distance agreement that specifies a $12,000 annual net commitment. He understands that the true-up will happen at the end of the contract year in December. Tony follows his brother’s lead and signs a similar agreement, but Tony’s agreement specifies a $1,000 monthly net commitment. Tony does not read the fine print and is unaware that his account will experience a monthly true-up. Over the year, they used the same amount of long distance and have the same rates, but Tony ends up paying more than his wiser brother. At the end of the year, they compared their bills and found that Tony spent $2,250 more than his brother.

Usually, the true-up happens in the same period expressed with the volume commitment. A monthly commitment of $1,000 is reconciled each month. An annual commitment of $120,000 is reconciled at the end of each contract year. These guidelines hold true in all cases but one. The major exception to this rule is with AT&T’s Uniplan billing. Uniplan volume commitments are expressed monthly, but the true-up happens at the end of the contract year. Therefore, a seasonal business is not penalized in its slow months.

Long-distance pricing : One-time charges

When you make changes to your long-distance account, beware of one-time charges. These charges are often listed on the bill as “set-up charges” or “installation charges.” Even if the amount of the charges is correct, carriers can almost always waive one-time charges. They are not always willing to waive these charges, but they are almost always capable of waiving the charges.

Because one-time charges are manually entered into the billing computers, the chance for human error is great. A manufacturer in the Midwest recently experienced a significant billing error with its carrier. The company added T-1 service in its domestic facility and at one of its Latin American facilities. The associated one-time charges should have been $1,060. These charges were never quoted to the company in advance because it routinely adds service at its various facilities, and the company trusted that the carrier would always bill it correctly.

When the company received its bill from the carrier, the charge was $106,000. The amazing part of the story is that the customer paid the bill and only months later began to question the charges. Its regular monthly bill was over $100,000 each month, and the extra $106,000 was not significant enough to immediately draw attention. When the company first questioned the carrier, the carrier’s representative simply explained that the charge was a one-time charge for installation of the T-1 in Latin America, and that charges in Latin America are higher than they are domestically. After months of research, and hiring a consultant, the puzzle was finally solved.

One of the carrier’s representatives explained that the overbilling was due to a simple data entry error. The person typing in the order accidentally typed in $106,000 instead of $1,060. Once the carrier admitted its error, it put a refund credit on the customer’s next invoice.

One-time charges