The Telecom Procurement/Contract Review

The following are guidelines and concepts that will likely provide many benefits if they are included in contracts. This is not an all-inclusive list of contract terms and conditions to review but serves as a sampler of some important contract elements:

• Tiered pricing. As the volume of purchases goes up, the discount applied off tariff should be greater. For example, domestic long-distance minutes might be 40 percent off tariff for the first 15 million minutes, 44 percent off for the next five million, and 46 percent off the next ten million minutes. Volume should always drive price.

• Most favored customer clause. The customer should get the lowest rates available to any of the vendor's customers of like volume and circumstances. If Billy Bob has 20 million minutes a year and gets 5.5 cents per minute on 800 service terminated to a dedicated location, then Mary Jane should get the same price, as long as she has the same volume of minutes and terminates in the same way (not switched).

• Technology upgrade. If the customer elects to use a newer technology, provided by the same carrier, to carry its traffic or perform other functions, then there should not be a penalty for converting to the newer technology. For example, assume that a business is using T1s to carry voice traffic and then elects to use a new technology provided by the same carrier to carry the traffic (e.g., VoIP). In such situations, penalties for drops below minimum requirements should be waived.

• Renegotiation. There should be at least an 18-month annual renegotiation for a long-duration contract. The parties should negotiate in good faith to ensure that pricing is "competitive" in the marketplace. Many contracts specify 12 months and some firms, for example, have the right to renegotiate every six months.

• Business downturn. If a division or business unit is sold or discontinued, the minimum annual commitments should be reduced by a pro-rata amount.

• Poison pill. Avoid a "poison pill" of zero discounts at some very high level of minutes that the vendor assures the buyer will never be reached. The purpose of the poison pill is to ensure that resellers do not grab the contract and resell the discounted minutes at a higher rate. In one situation, a firm's usage exceeded its wildest expectations and got hit with high incremental prices. It helps the carrier but does nothing for the customer.

• Exclusive contract. While it might be an advantage for the customer to use only one vendor, it is rarely advantageous to contractually specify that one firm is the sole provider. In fact, in a large organization, it is virtually impossible to police the network and ensure that a "renegade" department manager or field operator does not cut a deal with the local telco.

• Special requests. If the customer wants network maps, escalation procedures, vendor personnel on site, or other special requirements, putting those requests in the contract is the best approach.

• Discount-usage match. The value of the contract depends largely on how well the discounts on particular services match the actual usage. For example, 12 cents a minute to London from Denver is of little value if the company does only a couple of hundred minutes a month to that location. Categories include interstate, intrastate (varies by state), inbound, outbound, 800, calling card, domestic, international, Frame Relay, T1, T3, OC3, E1, etc.

• Installation waivers. Carrier installation costs should be waived for T1 and T3 installs (they may require the circuit to be in place for a year)

• Penalties. Carriers should always agree to a pro-rata refund if a leased line is down. Additional penalties can also be negotiated as part of a service level agreement.

• Minimum annual charges. The customer should be reasonably certain that minimums will be reached to avoid penalties. Negotiate for lower minimums. Consider the possibility that dedicated circuits may be economically justified; if X number of minutes to a specific location (e.g., Paris, France) are committed in the contract, the loss of those minutes could result in a penalty.

• Sub-minimums. Avoid excessive sub-minimums — some carriers require a specific quantity of 800-number minutes, switched minutes, Frame Relay circuit dollars, etc. The customer can get locked into a confusing hodge-podge of minimum commitments that must be monitored. Ideally, there should only be a few minimums or one large-dollar minimum (large-volume minimum).

• Audio conferencing. Consider carefully the IXC's audio conferencing service. If it is on par with other external firms, then it may be beneficial to add those minutes into the contract. However, if a large volume of minutes is used, the client may want to consider using in-house audio conferencing where the incremental "meet me" bridge cost is zero (of course, the up-front equipment investment as well as administration time must also be considered).

• Ramp-up period. If a customer has multiple carriers that are being consolidated into a single carrier (usually the most economical alternative), the contract should specify a reasonable "ramp-up" period. During this time, the customer can convert existing agreements to the new contract and identify all relevant locations (more difficult than it appears). Pricing during the ramp-up period should be no different than when all volume commitments have been met.

• Preparation for contract negotiations. The more information on volumes (particularly international locations), the better the deal a carrier can offer (if they feel the competitive pressure). Volumes (minutes) should be available as follows:

  • Interstate

  • Intrastate (by state)

  • International (by country)

  • Switched, dedicated, and "mixed" traffic

  • Audio conferencing

  • Inbound

  • Outbound

  • Toll-free volumes (domestic and international)

  • Directory assistance

  • Cellular long-distance

  • Video

  • Calling card (also by categories)

  • Data circuits: T1, T3, OC3, Frame Relay, ATM, etc.

• Ancillary services. These services should be defined and agreed upon. For example: Who issues the calling cards? How do calling cards get billed back to the individual business units/employees? Who deals with urgent matters (e.g., it appears that a card has been stolen — who authorizes cancellation of the card and issues a new card)? Who works out the procedures to cancel cards when employees terminate?

• Toll fraud monitoring. Does the carrier monitor for toll fraud? Is there a list of key employees at every relevant location that can make a decision on what facilities to keep open or shut down if toll fraud is occurring?

• Toll fraud insurance. The carrier should provide toll fraud insurance. Deductibles should not be excessive (e.g., not more than $15K to $20K per incident). Review the terms to ensure that the organization can comply and not have a false sense of security. For example, most toll fraud insurance terms require that DISA be disabled.

• Combined services. If the carrier offers both IXC and LEC services, there should be a significant reduction in pricing for those locations that elect to combine both services.

• Service provisioning. The carrier should maintain detailed electronic records of all orders (circuits, bandwidth required, locations, owner, characteristics of the circuit, etc.). Many are now offering browser-based packages that the customer can use to monitor the progress of the installation. The customer should receive regular status reports. No circuits should be implemented or disconnected without going through appropriate customer notification (change control).

• Network optimization. The carrier should commit to a periodic (quarterly; semiannual or at least annual) optimization review. For example, are there two T1s that are going from HQ to the same city but owned by different business units? Could they share the T1? Are there switched locations that can be converted to dedicated locations (this is critical and should be an ongoing review process)?

• Reporting. The carrier should provide extensive monthly reports showing volumes, commitment compliance, trends, and any management issues.

• Calling cards. Plans should be examined for options such as an 800 number to get into the carrier's network. With this feature, setup costs should be significantly reduced. A better option (if the carrier's billing system can do it) is to have the customer employee dial 0+ and have the carrier's network recognize that it is a card on "XYZ's" corporate plan and automatically provide the lower setup fee.

• Billing details. Is billing in six-second increments? Is there a minimum of 18 seconds? Does the firm have applications (modems) that have minimal duration calls?

• Options. What financial options are available? Are there up-front credits? Is there a bonus when certain volumes are reached?

• Exception reports. Will the carrier run regular exception reports such as longest calls (maybe modems got "stuck")? Calls by area code or city? By type of traffic?

• Carrier international relationships. What international relationships does the carrier have? Does the carrier have any global plans for specific international cities?

• Billing details. What are the nitty-gritty billing rules? For example, if a fax machine tries multiple times to reach a location (most relevant for international faxes), does the carrier bill for repeated tries or only for actual minutes after connection?

• Single points of contact. Will the carrier identify an individual to be the customer contact point for troubleshooting?

• Rollover terms. What are the rollover terms? Does the contract stop on the termination date or roll over if no notification within 90 days?

• Mobile phone negotiations. Will the cellular provider PICC all long-distance calls to the organization's carrier? What are the time of day/weekend terms? What are the roaming conditions? Is there an on-site service rep? Can executives get premium support? Does equipment always have to be ordered from an out-of-town location, or is there a store on hand for emergencies/executive needs? Does the cellular provider have GSM phones? Are the GSM phones linked to the employee's account? How is billing done — individual statement or mass bill? How are defaults handled (employees who leave the firm or make phone calls they cannot pay for — yet the company has "guaranteed" payment of the bill to get the lowest rates)?