Wednesday, October 15, 2014

Tips from an industry insider: Is Your Company A Victim Of "Telecom Extortion?" A Negotiating Tip From A Telecom Industry Insider.

Every day I hear clients say they that they feel they should wait 2 years before they can start renegotiating a new 3 year telecom contract.
This can be a very costly mistake. For large enterprise data networks, it is imperative to start the data gathering and preparation for the negotiating process at least 12-18 months into a 3 year deal. If your company does not have a viable alternative in place to use as leverage by at least 12 months before your current contract expiration, your carrier may have already won. Carriers will only react to either the promise of more business or the threat of losing of business. The bigger you are, the worse it is. If you are a large company, it can take upwards of 8-12 months to move to another carrier. Your carrier knows this. Collecting requirements, putting together RFPs or RFQs can take 2-5 months. The bigger the company, the longer it takes to gather the necessary data. Now there is only 7-8 months until contract expiration. Even though other vendors are offering a 30% reduction, your incumbent will typically offer a nominal 5-7% discount for a 3 year renewal. Upon showing the incumbent how much savings could be achieved by moving vendors, they will most likely play the "partner card" and start working on a better proposal. If it is one of the "Big Two" carriers, they are experts at stalling. They can easily delay proposals for 2-3 months while they "get special pricing approval and run it through finance and engineering" a half dozen times. Now there is only 6 months remaining until expiration. At this point, your incumbent has all the leverage.

Have you ever noticed that the big two's carrier's contracts are structured in such a way as to provide a 85-95% discount off their standard rates where other carriers will quote a fixed rate? Say what they will, but this is how vendors turn into professional extortionists. No broken limbs, but extortionists just the same. With only 4-5 months left, your incumbent will come back with a new 3 year renewal proposal offering a slightly better 10-15% discount off of their current rates. Remember, much of the telecom market has been experiencing 12-25% year over year, CAGR price decreases. By the end of your first 3 year term, it is likely that market prices have already dropped over 30%. They will also continue to do so for the next 3 years. At this point, there may be one final push to get your incumbent to lower their rates. The incumbent will say no. Why would they lower their margin when they have all the leverage? To buy some extra negotiating time and be in a better negotiating position, some will ask for a 1 year contract extension instead of a 3 year extension.
This is where the extortion comes in. In a polite way, your incumbent will tell you to either sign the deal on the table, "or else" rates will go up 10 fold when the 90% discounts disappear when the contract expires. When this happens, their are very few options other than to renew for another 3 years and be stuck paying 30-50% over the pricing that even smaller companies enjoy. This reduces your company's competitive cost advantages.
There are a number of ways to mitigate these risks however; I will save that for another post.