Develop a Cost Management Vision

Why develop a cost management vision? Controlling costs within the telecommunications network is hard work. Some projects are easy with a high payoff; others require constant review. Without a clear vision of the outcome, good intentions may falter. Similar to affirmations in self-help books, a cost management vision might read as follows:

The architecture of the network (data, voice, hardware, leased lines, etc.) will, by its structure, minimize costs.

Monitoring systems will alert management of financial exceptions.

Configurations and clusters of technology will be flexible and scalable to reflect declining unit costs resulting from technology improvements.

Network investments will match the business culture — no long-term investments for an organization that demands a very quick payback from all its other capital expenditures.

Financial commitments for telecom services are flexible and can accommodate acquisitions, divestitures, major application changes, and rapid growth.

Telecom should be perceived as an asset — not just a commodity.

All alternatives that best support the core business, including outsourcing, will be periodically reviewed for applicability.

After the telecom cost management vision is developed and tailored to the culture of the organization (risk tolerance, scope and level of desired savings), the next step is to consider how to start.

How Do Organizations "Make It Happen"?

Telecom cost management is both a project and a process. A project is needed to gather information and make the right decisions. The process ensures that any gains will be maintained. When considering how to start the process, management should start with the following questions:

Does staff exist within the organization to perform the analysis required to manage costs? For large organizations, a telecom cost management project may require months of work by skilled analysts.

Does the firm have the appetite to consider telecommunications changes (either technical or procedural)?

Is there a bias for or against outsourcing? One note of caution: even if the business culture is strongly pro-outsourcing, it is important to have at least a high-level, in-house understanding of the telecom environment to ensure that agreements with the vendor of choice are equitable for both parties. Another approach is to use the services of a third-party outsource consultant.

Do the individuals assigned to perform the initial analysis have the right background for the project? Do they know telecom billing, tariffs, telecom taxation, and industry trends (business and technical)?

What outside resources are contemplated — consultants, telecom auditing firms, outsourcing firms, or others?

When considering how to move forward with the project, risks should be explicitly considered. For example:

What would be the effect of changing carriers? Telecom managers generally dread carrier changes, even if they are dissatisfied with the carrier. Changing circuits and other infrastructure often causes some disruption that users notice.

Are users willing to accept technical changes if they cannot directly see the benefits? For example, consider the change from remote dial-up (using a remote access server) to using a VPN (virtual private network) for connecting to the network. Until all the ISPs across the country get their account numbers correctly loaded, remote users might occasionally fail to get on the network. In the long run, it is certainly the most economical practice for large numbers of remote workers, but there is some short-term pain in the transition.

Are negotiators for contract changes experienced in telecommunications? Strong negotiators can push telecom vendors for rates so low that the result is not a win-win situation. The telco may be tempted to devote attention to other customers. Also, negotiating for the right prices and services is critical. Why negotiate a 5-cent-per-minute rate to the United Kingdom when the firm makes only a small number of calls there each month?

Looking for the Quick Fix
Organizations have many agendas and priorities. Sometimes, telecom decisions are not made for the long run because there are more pressing issues. Like the Russians in World War II who, in desperation, sometimes sent unpainted tanks to the front in winter, business managers have to survive the present and not worry about the rust of the future. Accordingly, there may be times when a quick fix is necessary. Save some money now and go after the deeper savings later.

Following are some considerations and approaches for telecom short-term relief:

Use contingency-based auditing firms. Relying on splitting the proceeds of finding errors and overbillings, contingency firms become speedy and efficient. Their goal is to send in highly trained, "drill-down" staff; find the gold nuggets; and move on. The downside to this approach is that changes in processes that would prevent the errors from occurring in the first place are sometimes not addressed. In addition, this style of telecom auditing emphasizes reviews of bills, agreements, etc., rather than technology alternatives. The question "Was there an erroneous bill for a T1 after office X closed?" might be asked. The question "Should frame over DSL be used in place of a T1?" will likely not be asked.

Renegotiate the contract for immediate relief. Many carriers, anxious to lock in a customer for several years, will lower unit costs in return for longer contracts.

Throw telecom "over the fence" to an outsource firm. In fairness, this may be a perfectly acceptable long-term solution as well. However, if the deal is done quickly and without adequate knowledge on the part of both parties, it might not be optimal for the long term. But certainly if telecom is "out of control" and expense management has not been a priority, outsourcing can likely assuage the financial worries of management (at least for telecom).

It is important to recognize that the above comments are generalizations. For example, Houston-based Teligistics performs both contingency work and some process work, such as long-term "pre-audits" of bills. In other words, for a monthly fee, Teligistics will take the client's bill from the carrier, run it through an automated error detection system, and then send it to the client for payment (or the bill may be paid on behalf of the client). A sample variance report provided to the client is shown in Exhibit 1.


Exhibit 1: Automated Variance Analysis: Billed Rates versus Contracted Rates

Special Needs and Groups within the Organization
Like Orwell's pigs, some groups are clearly more equal than others in terms of their telecom needs. When developing a comprehensive vision of telecommunications — how costs are to be minimized while maintaining service levels — all special groups need to be considered. The classic example is the call center. With hundreds or even thousands of agents, call centers (also called contact centers) are massive bandwidth and service users. Uptime is essential and in some cases, such as Dell Computer Corporation, telecommunications provides the sole "face" of the company to the end customer. If the phone lines and Internet cables are down, how can computers be ordered?

Tailoring of requirements helps in negotiations and architectural design. If electricity traders make 50 percent of their profits in just 5 percent of the available trading day, the phone lines really need to be up 99.999 percent of the time. Hence, additional circuits, rerouting features, and other contingency services need to be included in any negotiations with the local or long-distance carrier. If the contract negotiator fails to appreciate specialty group requirements, long-term telecom costs could be inadvertently increased.

Some other considerations that affect the cost management vision include:

Is telecom decision making centralized or decentralized? The preference for centralized-decentralized operations swings along its arc every decade or so. However, for telecommunications cost management, centralization has always been best. Carriers reward volumes and a balkanized approach to telecom always means higher cost. "Boudreau" in Beau Bridge, Louisiana, may get a good Frame Relay price from his brother-in-law; it may, in fact, be better than the corporate office in Houston was able negotiate with the carrier of choice. But considering the sum of all telecom costs, the corporate agreement is most likely less expensive.

Is change constant? If so, long-term contracts are even more risky.

Do the voice and data people talk with each other? IT, data communications, and voice communications should be integrated. Otherwise, sub-optimization will result.

Incidental Revenue
The best way to reduce telecom costs is to find ways to make them go below zero — in other words, collect revenue from telecom-related functions. For example, one Midwestern department store chain operates a 900 number service that charges firms that call to verify prior employee work history. Telephone services for students have long been a revenue source for universities. Businesses have become increasingly clever in using telecommunications for profit, or at least offloading some of the costs to customers.

The request for proposal process

What is a request for proposal?
A request for proposal (RFP) is a document sent to telecom carriers from businesses seeking proposals from those carriers. Each RFP is unique, because each customer’s telecom environment is unique. The RFP document spells out specific details about the information the business wants the carrier to provide, especially the technical data. Sending out an RFP is usually the first step in procuring high-level telecom services, such as datanetwork installations. The RFP is sent out to multiple carriers and is essentially an invitation to a bidding war.

What is the purpose of an RFP?
The main purpose of an RFP is to solicit proposals from phone companies. The average business signs 2-year telecom contracts, and at the end of that time, the business may have lost touch with telecom market trends, products, services, and, most importantly, pricing. It has no idea what a good deal in today’s market is until it reads carriers’ responses to the RFP.

After evaluating two or three RFP responses, the business will have a clear understanding of the carrier service offerings and what pricing is available. Gathering market data is, therefore, one of the key advantages of using an RFP.

Some customers require the telecom supplier to include the RFP as part of the final agreement. Without the RFP, the carrier’s contract is the agreement. Carrier contracts are written by telephone company attorneys; they protect the interests of the carrier, not the customer. A well-written RFP, however, protects the interests of the customer, and, at the same time, sends strong signals to the carrier that the customer is in control of the relationship.

The main disadvantage of using an RFP is that the customer invests considerable time writing the RFP, evaluating RFP responses, and meeting with prospective carriers. This can be a time-consuming process. On the other hand, businesses can avoid the RFP process altogether if they are satisfied with their current carrier and are willing to allow the current carrier to provide the needed services.

What is the RFP process?
The RFP process consists of five phases:

The RFP is released to phone companies.

Phone companies question and clarify the RFP.

Phone companies submit proposals.

Customer evaluates proposals.

Customer selects the winning proposal.

What is specified in the RFP?
The core data in an RFP are descriptions of telecom services that the business has up for bid. These may be current services or future services that the business plans to add. RFPs can be used to procure local, long-distance, data and wireless services, network design, network installation, or any other imaginable telecom project.

An RFP explains the customer’s expectations for customer service, service ordering, trouble reporting, billing, resolution of service outages, and SLAs. Numerous other issues can be included in the RFP. The whole idea behind an RFP is that the customer manages the procurement process, not the carrier.

A key feature of the RFP is its scalability. The scope of services covered by the RFP can be increased or decreased. A business may use an RFP to procure 25 cell phones, while another business may use an RFP to procure all of its telecom services, including local, long distance, data, and wireless.

For high-tech services, such as frame relay and ATM, the RFP should give the customer’s specific technical requirements for these services. The RFP can be customized to include a large or small amount of technical data.

Who should use an RFP?
RFPs are normally only used by very large companies with complex, expensive telecom services. Smaller companies tend to solicit proposals informally, and they often do not have the time or manpower to devote to the RFP process. Larger companies have telecom departments, so they have the manpower to facilitate the RFP process. Bigger companies have more internal accountability and organizational layers, so the RFP also tends to appease these people inside the company. Many government agencies, for example, are required to secure multiple bids before entering into a new contract for services. Organizations that use RFPs tend to protect their interests more than businesses that shop informally for telecom services.

How does a phone company respond to an RFP?
After a phone company receives an RFP, a team of salespeople begins writing the response. The sales team consists of pricing experts, technology experts and possibly, on large accounts, regulatory experts. Their written response will follow the general outline of the RFP.

Carriers may try to gain a competitive edge by asking the customer questions to clarify vague parts of the RFP. Customers usually level the playing field by requiring that all questions be put in writing. Then, the customer sends each carrier a copy of the question and the customer’s answer.

The RFP process is designed to be an objective avenue for buying telecom services. None of the carriers should gain an advantage over another bidder. No carrier knows which way the customer is leaning. The objectivity of the RFP process should keep carriers honest. Because carriers know they only have one chance to win the business, they will be more likely to give their best and final offer in the very beginning.