How to Maintain Competitive Global Network Costs in a Rapidly Changing Environment
The cost of an organization’s telecommunications services (voice, data and wireless), typically accounts for three to six percent of overhead, and can average more than two percent of total revenue*. In addition, telecommunications services spend is increasing. Industry forecasts predict that enterprise businesses’ spend on IT and telecom will increase 3.7 percent in 2012 over 2011**.
That level of cost coupled with the anticipated increase makes controlling total network spend a top-level imperative for all IT leaders, requiring them to scrutinize telecom costs and seek out every option for savings. Over the past 10 years, working with hundreds of clients, Alsbridge has learned a thing or two about managing network spend, and we’ve identified the following trends and price management strategies to help IT leaders rein in runaway network costs.
Industry Overview and Recent Trends
Alsbridge breaks the wire-line market into several groupings. First are the Full Service Providers, the perennial powerhouses (AT&T, Verizon and Sprint). Then there are the Business Wire-Line Providers (Level 3, CenturyLink, XO, TW Telecom, Windstream). And finally, there are the niche Specialty Services Providers who generally consist of smaller US-based carriers providing limited services (Granite, Virtella, New Edge, Cogent, etc…).
These Specialty Services Providers are frequently being acquired by the Business Wire-Line Providers as they continue to consolidate to gain critical mass.
Full Service Providers
The telecom market has been volatile over the past several years, and Alsbridge sees no near-term end to that volatility. The Full Service Providers are fighting on many fronts. They continue to struggle through integration issues from earlier acquisitions while simultaneously working through high-profile consumer-market service and delivery problems. These activities draw attention and spending away from business services. As a result, it’s increasingly difficult for Full Service Providers to retain quality FTEs, maintain high service delivery levels, and effectively manage billing, support and stewardship. In fact, Verizon has recently instituted a “pay for service” pricing to address this problem.
Sprint is primarily focused on growing its wireless services and investing CAPEX in 4G. They regard the wire-line network as the “cash cow” for continuing this investment. While they have a loyal customer base, they often lose share in competitive bids either due to non-competitive pricing or refusing to bid on traditional TDM services. This strategy is inconsistent with enterprise customers who are attempting to consolidate carriers, services and contracts. In competitive bids, Sprint continues to lose share to AT&T and Verizon due to their lack of investment or focus on the enterprise market.
Business Wire-Line Providers
Qwest, now Century Link, is undergoing significant change and is now a more viable competitor in the IXC market with the increase in access network from the legacy CenturyTel network and the addition of the Savvis co-location assets. CenturyLink now has the ability to price services more aggressively without impacting margins and we have seen evidence of that. The contracting process continues to be challenging and the apparent influence of the legacy CenturyTel ILEC mentality reinforces past behaviors. And, without an asset based wireless offering and limited international scope, is often not considered a viable alternative in large enterprise-wide sourcing projects.
The Business Wire-Line Providers continue to consolidate as evidenced by the Windstream acquisition of PAETEC and the Level 3 acquisition of both Broadwing and Global Crossing. These carriers appear to be trying to close the gap to Full Service Providers however, as of yet no carrier has stepped up to take a clear leadership position or challenge the Full Service Providers with a complete suite of enterprise services. We do anticipate one or two of these providers—whether they are US-based or international—to make a move in the next couple of years to become the leader of this provider group, but there will continue to be volatility in this portion of the carrier market for the time being.
These providers though do offer viable network service offerings with the most aggressive pricing and flexible contract terms.
Finally, on the Integrator front, we’re seeing companies such as HP, IBM, CSC and Dell Services beginning to de-couple transport services and enterprise clients contracting directly with the carriers while the Integrator continues to provide Network Management Services (NMS). This has yielded significant cost savings for those enterprise clients who have adopted this approach.
Just as the world is becoming increasingly global, the international telecom market is growing rapidly for enterprise customers. In the past, enterprise buyers were generally able to build their telecom provider strategy around a domestic/global breakpoint, using one provider for their domestic needs and another (or several others) for their global needs. With the growing need for global control and fully meshed IP, this is no longer the best option, and buyers would ideally contract for these services with one provider.
However, at this point, companies continue to struggle to develop a global, fully-meshed, IP-based service. Most carriers don’t have the capability to provide that kind of service. Converged services have been studied as options, but deployment has been slow because:
1. Capital expenditure has been limited for the past couple of years by the economy and,
2. Pricing for the traditional TDM space continues to compress, making ROI in VOIP and SIP difficult to attain. That said, TDM voice has now begun to flatten out at 0.008 and savings are now obtained by implementing the new technologies.
At this point, only the Full Service Providers are able to serve buyers’ global needs. Alsbridge is not seeing the international carriers (BT, Orange, NTT, Cable & Wireless, Colt) aggressively pushing into the US market, making it difficult for them to compete for international deals with global companies.
At the same time, Level 3 is the only Business Wire-Line Provider that has made the investment to become competitive globally through the acquisition of Global Crossing. While we anticipate continued change as the international and US-based providers look to round out their global capabilities, the current reality is limited to a few single source choices for buyers of international services.
Telecom pricing has shown significant decreases over the past four years, with the depth of the decline depending on the specific services used as evidenced in Chart 1.
Both Graph 1 and Graph 2 indicate two trends: a continuously declining average price (as indicated by the green line) and a continuously declining price point (as indicated by the blue line).
The price gaps between the lowest price point for a particular service and the average price for that same service are the result of:
1. Inefficiencies in the market; price point differentiation is the result of some
buyers aggressively negotiating discounts while many buyers do not push for price concessions.
2. Price points are trending downward.
Although many of these services are highly commoditized, Alsbridge has seen price spreads of 30% to 40% depending on the service category group. We anticipate these pricing declines to continue at essentially the same rates, particularly in international TDM.
Alsbridge expects the market to continue to experience the following trends for the near-term:
- Full Service Providers will continue to be difficult to negotiate with on pricing and contract Terms and Conditions as they flex their market power and continue to focus on trying to maintain their market share and revenue streams as they adjust to new market conditions and an overall shift in mindshare and CAPEX from the enterprise to the wireless and consumer markets. As a result, contract pricing and Terms and Conditions will begin to be a real differentiator between Full Service and Business Wire-Line providers.
- Layoffs will continue at Full Services companies, making retention of quality FTEs increasingly difficult.
- Vendor consolidation will continue, while integration issues also plague the market.
- The Business Wire-Line space will experience more activity, including increasing financial stability, driving better scale and service.
- Network services pricing will continue to decline year-over-year.
- The gap between the lowest price point for a particular service and the average price for that same service will widen.
- Bandwidth consumption will continue to grow, with the expectation that price will not.
- Enterprise IT investment will increase.
- IT organizations will continue to struggle internally to develop fully meshed IP global strategies.
- Wireless services will play an increasingly larger role in enterprise networks with new challenges
Network Cost Management Strategies
Recent trends in the market (i.e. increases in utilization, market volatility and price declines), demand IT leaders remain constantly vigilant to ensure that they aren’t overpaying for network services. Alsbridge clients have found the following strategies most effective in managing network costs.
Internal/User Management Strategies
Employ telephone expense management services – Telephone Expense Management (TEM) is an established methodology and toolsets that organizations use to effectively manage the telecom network. TEM addresses all areas engaged in the network (the technology, processes, policies) and implements a standardized set of practices to ensure inventory, utilization and invoicing are closely managed and meet the contract and SLA terms.
Among the many benefits of TEM are:
- A complete, up-to-date inventory of current products and services
- EDI delivery of billing and usage data
- Automated monthly audit and cost allocation
- Significant time and cost savings in the analysis of network usage, management and spend
- Identification of cost avoidance opportunities – invoice error discovery, missed invoices, etc.
TEM services can have a substantial positive impact on your network management and cost control. For more detailed information on how TEM could work for you read the Alsbridge White Paper, “A Better Way to Cut Costs with Telecom Expense Management.”
1. Inventory and audit current telecom purchases—It’s so obvious that it almost goes without saying… almost. Given the high speed of change in the marketplace – both inside and outside of an organization – it’s not necessarily easy to keep up with a changing network. Whether or not you make use of TEM (and TEM certainly makes this process easier), it’s vital to have a complete and clear understanding of current lines, products and services so that you can ensure (A.) your organization is actually using them; and (B.) you are being charged appropriately for those products and services.
2. Optimize current circuits and services—Consider Unified Communications and migrating traditional TDM services to converged network services like VoIP and SIP Trunking. Given the current price points for TDM voice you can no longer expect to generate the historical savings associated with just price renegotiation. The next wave of savings will be gained by implementing the new converged services technologies.
Also consider wireless optimization services. These can generally reduce costs 15-25% without the need to change carriers or
devices and are transparent to users. These may be offered as stand-alone services or through a TEM provider.
Contract Management Strategies
1. Use vigilance with contract terms and structure—As we’ve noted, telecom service has been deteriorating in recent years, particularly among Full Service Providers as their attention has been diverted to other activities. For that reason, it’s essential to ensure your contract terms and structures are appropriate for the situation. Alsbridge maintains a list of 20 plus items that should be in every contract, including business change, technology change, periodic rate reviews, Service Level Agreements (SLAs), stewardship, and many more. We also recommend that the conditions include compensation for failure to perform.
2. And then commit to monitoring those terms—This may seem self evident, but it’s not. Many IT leaders think the hard work is done once the deal is inked. Not so – the real hard work is in actively managing contracts with service providers. You must monitor your SLAs and make surevendors are meeting the goals you outlined in the contract. An additional advantage is the leverage you’ll gain when it comes time to renegotiate your contracts.
3. Engage in annual rate reviews—Given market, price and vendor volatility, it’s vital that all contracts have an annual rate review clause – and one that actually has teeth. In our experience, providers often have what we call the “we’ll talk” language in their contracts: they’ll agree to essentially any provision as long as they can ignore the issue if they disagree with it after discussion. From our point of view this is tantamount to having no clause. Alsbridge typically advocates for firm clauses and a commitment reduction in the 20% range if the parties cannot come to terms on new pricing.
4. Plan ahead for renegotiation and begin the process early—Contract review and negotiation always takes longer than anyone anticipates. If you get started too late, you may not ultimately have time to make the changes you want to make, thereby losing much of your negotiating leverage. Alsbridge suggests starting the process at least 12 months prior to the actual contract “burn date” as differentiated from the renewal date to provide plenty of time to issue RFPs (see below), review your options, and put together an exit strategy if needed.
5. Use an advisor – As previously noted, telecommunications contracts typically account for three to six percent of overhead; they also have a significant impact on your business operations. You can’t afford not to use every tool at your disposal to ensure you get the right service at the right price. Advisors have a view of the entire landscape and knowledge of every type of service, contract and deal currently in place. That knowledge and experience can be the essential difference in your deal.
6. Press for savings on international services—International PTT access is difficult to benchmark and the carriers typically use the local PTT for access to their networks, however there are viable alternatives and the opportunity exists for costs savings using this approach. Additionally, new entrants have created a competitive environment in many countries. The result is a great deal of price compression, and therefore even higher potential savings in a first-time contract negotiation. Whereas on average we see 26%+ savings in first-time contract renegotiation in the US market, we see savings of 35% or more on those same first-time negotiations in the international market.
Provider Management Strategies
1. Engage in a multiple vendor RFP - It used to be that providers would respond to an implied competitive threat during a sole source negotiation; this is no longer the case. Use your advisor to benchmark your services against the market to establish a target savings range at the service element level and aggregate network level, then plan to issue an RFP to multiple providers. Use the RFP to create awareness of a competitive threat and use the benchmark to evaluate the RFP responses rather than by comparisons to each other. Using market pricing knowledge with the threat of share loss in the negotiation process is a good way to demonstrate to your provider(s) that you mean business.
2. But be cautious of channel partners—Many consulting organizations in the marketplace are actually channel partners with the providers – that is, they are awarded a commission when they sell a contract, and particularly if they bring a new client to a provider. Be sure to ask any consultant with which you’re considering working with about any affiliations they have with providers. This is also true of notable TEM providers managing wireless services. Be sure to ask your TEM provider who is credited with the activation fee when devices are added.
3. Pursue an active secondary strategy—Select a segregable set of services, package those services together and find a different provider from your primary provider.
This doesn’t have to be a large contract, just enough to develop a relationship with another carrier to keep your primary carrier competitive.
4. Consider other non-full service providers—As newer US-based providers emerge and the traditionally international providers press into the US, there are increasing options outside of the current Full Service Providers. Now is a good time to widen your horizons and begin to develop relationships with some of these other carriers.
With network services pricing continuing to decline and utilization continuing to increase, IT leaders have to consider and implement sourcing and benchmarking strategies that will help them control telecom costs and ensure effective service. Understanding recent market trends and forecasts is the first step to getting a handle on those cost and service issues. Coupling that understanding with industry-leading insights on how to effectively create a benchmarking and sourcing approach is the winning combination to successfully managing your network strategy.
*Peer to Peer Magazine, “Taming Telecom Costs”, p 10 http://www.mygazines.com/issue/27607/8
**“Gartner – Worldwide IT Spending Forecast 2012”, http://news.cnet.com/8301-1001_3-57352817-92/gartner-lowers-global-it-spending-forecast-for-2012/