Is it switched or dedicated?

A switched connection is a temporary connection made between two points by passing through a switching device such as a phone company central office. A dedicated connection is a permanent connection made between two points.

Long-distance calls are either billed as switched or dedicated. Most phone calls are switched. All residential calls are switched calls. Figure 1 shows how a switched long-distance call works. When a caller dials a long-distance number, the local carrier’s central office interprets the “1 + area code” that was dialed and then switches the call to the long-distance carrier’s nearest point of presence. The long-distance company then carries the call across its network. On the long-distance carrier’s bill, this call will show up under the heading “Switched Long Distance.”


Figure 1: Switched long-distance call.

The term “switched” refers to the fact that the first leg of the call was switched at the local carrier’s central office. This also means the long-distance carrier is paying access fees to the local carrier for this call. Figure 1 shows how the access fees are charged on a long-distance call. For this reason, switched long-distance rates are normally 3 to 4 cents higher than dedicated long-distance rates. If the access fees could be avoided, then the long-distance rates the customer pays should theoretically be 3 to 4 cents lower. This is precisely the reason why dedicated long-distance rates are lower than switched long-distance rates.

Dedicated long-distance service uses a T-1 circuit from the customer’s premise that connects directly through the long-distance carrier’s point of presence. This dedicated line carries all of the voice long-distance calls. The calls bypass the local carrier’s network, so the long-distance carrier does not pay access fees for these calls, which results in lower rates for the customer. Figure 2 illustrates how a dedicated long-distance call works.


Figure 2: Dedicated long-distance call.

Although the long-distance rates decrease with dedicated service, the customer will have the added monthly expense for the T-1 circuit. Even though the local carrier provides the physical circuit, the T-1 is usually billed by the long-distance carrier. The long-distance carrier will charge a fee for securing the T-1 facility from the local telephone company. This fee is usually called “access coordination” and costs about $85 per month. T-1 monthly costs range from $250 to $1,200 per month, depending on the mileage from the central office and the discount amount. The greater the mileage, the greater the cost.

T-1 installation
The one-time initial T-1 installation typically costs $1,000. The long-distance carrier will normally waive the installation cost if the customer has some negotiating leverage. If you are a new customer with the carrier, it will almost always waive the cost of installation because it is eager to win new business. If you have had any recent billing errors or service issues, carriers will almost always consider your inconvenience and waive these charges.

Beware, however, that your long-distance carrier representative normally only quotes the installation costs associated with the T-1 line. He probably does not have the expertise to determine whether or not your telephone equipment will be compatible with that T-1 line. Prior to placing any orders with your long-distance carrier, it is imperative that you consult with your equipment vendor.

In some cases, the telephone equipment may need costly upgrades that could make the project cost prohibitive. If the equipment only needs minor upgrades, the long-distance carrier may issue an invoice credit to cover the expense of the new equipment.

National accounts (Telecommuncation)

A basic rule of economics is that the more a customer spends, the better pricing he receives. This principle is at the heart of long-distance carriers’ national account pricing models. A large national company with multiple locations, such as Holiday Inn, can aggregate all of its long-distance volume under one national contract with a single long-distance carrier.

Even though each individual hotel spends only $2,000 to $5,000 per month in long distance, collectively all the properties spend more than $1 million per month. Each location individually is not enough to turn carrier’s heads, but the opportunity to win the entire corporation’s longdistance business is enough to make carriers bring their best offers. Each hotel property will then pay long-distance interstate rates as low as $0.03 a minute, while an independent hotel may pay $0.10 per minute.

Ironically, long-distance carriers usually do not bring their best offers when bidding for a national account such as Holiday Inn. Instead, they steer the negotiations around a separate topic such as network reliability, network features, or billing features. These items are of the utmost importance to a national business, but differences between the carrier offerings are minimal. As stated before, long-distance service is more of a commodity today. Besides the customer service provided by the individual account team, the only thing separating one carrier from another is price.

Long-distance carrier national account teams are some of the best negotiators in the business world today. This statement is based on the dozens of national accounts with which I have worked. In almost half of the cases reviewed, I found that residential users spending $25 per month were able to negotiate lower rates than these Fortune 500 companies.

One Fortune 500 company was content paying $0.25 cents a minute for dedicated interstate long distance, because it was “too much hassle to have the long-distance carrier work on better rates.” The customer cited that the carrier was too busy with her numerous requests for the home office to worry about a remote site. This practice cost the company thousands of dollars each month in unnecessary overbilling, but the controller at that site refused to change anything.

Autonomy: Who is in charge?
Some national companies specify which vendors their remote locations may use. For example, Holiday Inn’s corporate office may mandate that each hotel use Sprint for long distance. This arrangement can prove very frustrating in the case of a franchise, where an individual owns and operates his own hotel under the auspices of Holiday Inn. With other national businesses, each location is autonomous; it can choose its own long-distance carrier. In this instance, the location should compare the difference in rates between its current plan and the national plan negotiated by the home office. The national account pricing may be very aggressive, and it may make economic sense to switch the long distance to the national plan.

When a remote location joins the national account of the home office, the phone bills might be consolidated. The remote site’s usage will show up on the home office’s bill. This creates additional internal accounting work for the customer.

The home office gets all the goodies
Most of the larger carriers can create a billing platform that allows the corporate office to be subsidized by the remote locations. This is accomplished by having every location pay the same rates, but the home office receives a disproportionate discount amount. So, for example, with a national chain of franchise hotels, each hotel may pay long-distance rates of $0.10 a minute, but the home office only pays $0.02 a minute. In extreme cases, the remote hotels may pay $0.12 per minute, while the home office has free long distance or is paid a commission check each month. Such an arrangement can be costly for a business, unless, of course, you are the home office.

Another problem with national account billing arrangements is that the home office “gets all the goodies,” as one consultant said. National account teams are encouraged to give premiums to their clients. If a national account bills more than a $100,000 a month in long distance, the account team will lavish the home office with gifts such as free prepaid calling cards, golf outings, free lunches, and vacations. These premiums have proved to be very instrumental in helping the account team retain an account. Such premiums have also influenced many customers to choose the wrong long distance for their corporation. The opportunity for personal gain sometimes outweighs a person’s ability to objectively manage his organization’s expenses.

Move away from a national account
Because of the numerous pitfalls associated with national account billing plans previously mentioned, it might be beneficial to cancel the plan altogether. A national account that allows its locations to manage their own expenses can set a pricing benchmark and require all locations to negotiate their own long-distance contract as long as the rates are below the benchmark. This is not easy, however, because bills are confusing and rates are normally difficult to interpret.

Normally, the greatest cost reduction strategy with national accounts has to do with remote locations separating from the national account. If the remote locations are autonomous and can choose their own long-distance plan, they should calculate the rates they are paying on their current bill with the national account and negotiate a better plan on their own if they are free to jump ship.