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Negotiating Telecommunications and Network Management Services Agreements: A Realistic Assessment for Domestic and Global Energy Companies

Date: Apr 14, 2005


Telecommunications and network management services procurements ("Services Procurements") are one of many commercial technology procurements regularly conducted by large businesses, including firms in the energy industry. A systematic approach to Services Procurements maximizes the likelihood of success as measured by the timely deployment of services, competitive rates, and an agreement that balances the business, legal and operational interests of the customer and services provider. Such an approach will become more important for business customers as consolidation within the industry accelerates with the proposed mergers of AT&T and SBC and MCI and Verizon, respectively.

In this paper, we describe a systematic approach by reviewing six phases of Services Procurements:

  1. Planning
  2. Request for Proposal (Contents of the RFP and Review of Responses)
  3. Negotiating Agreements
  4. Initial Implementation, Service Ordering and Provisioning
  5. Account Team Support, Rate Reviews and Technology Uplifts
  6. Strategies for Meeting International and Global Requirements

The phases are interrelated; one phase typically builds upon the outcomes of a preceding phase.

We also comment on the relationship of agreements for telecommunications and network management services to IT outsourcing agreements. Our experience has been that separating these agreements and maintaining direct relationships with telecommunications carriers for the provision of telecommunications and network management services better serves the interests of most large business customers.

Before reviewing best practices and negotiating principles for Services Procurements, several "business realities" should be noted. Similar to most procurements or commercial relationships, customers having substantially more voice and data telecommunications requirements are better positioned to secure more favorable rates, terms and conditions. Generally speaking, a customer with $5 million in projected annual expenditures has significantly more leverage with the principal telecommunications carriers than a customer with $500,000 in projected annual expenditures.

There are three important corollaries to this general proposition. First, the principal telecommunications carriers and services providers value the $500,000 per year customer differently. This customer is noticeably more valued by the 2nd, 3rd and 4th largest interexchange carriers, as compared to the largest interexchange carrier. Second, the customer having the lower projected expenditures is often presented with a proportionately larger minimum purchase requirement. Third, historical data confirm that rates vary significantly among customers having comparable expenditure levels, even among the largest customers. The same is true for the balance of the terms and conditions in services agreements. Thus, all business customers will enhance their negotiating leverage and achieve a more balanced agreement in terms of rates, critical business terms and legal risks by following the systematic approach outlined in this paper.

  1. Planning

    Planning entails an assessment of the company's telecommunications and networking requirements, and taking steps to ensure the Services Procurement is structured to meet these requirements. As the process begins, the customer's procurement group (or the IT vendor management organization), its IT or Telecom department, and management should be in agreement on the principal objectives of the procurement.

    The Planning phase should confirm, for example, whether the company is looking to deploy new applications that will require additional bandwidth or whether the "any-to-any" connectivity of Multi-Protocol Label Switching ("MPLS") is critical to meeting the business' projected data communications requirements. Other decisions that should be made at this juncture include the list of prospective vendors and whether the procurement will be awarded to multiple vendors.

    A principal task of the Planning phase is to determine the services to be purchased and whether the procurement will encompass domestic, international or global requirements. The major service categories may be summarized as follows:

    • Interexchange wireline voice and data services
    • Local exchange and Wireless mobile services
    • 1
    • Dedicated Internet access service
    • Data center services (Hosting, Managed Firewall Services)
    • Managed services and customer premises equipment ("CPE")

    A closely related question is whether current technologies for data and voice requirements will be retained, replaced or determined based on the responses to the RFP. Alternatively, a company may have the more limited objective of simply securing improved pricing from the incumbent provider(s) and retaining the current mix of services.

    A best practice that regularly contributes to the success of procurements is providing adequate time to issue the RFP and review the responses, select the preferred vendor(s), negotiate the agreement(s), and deploy the new services prior to the expiration of the term or transition period provided under a customer's current services agreement(s). The logic is straightforward. In order to secure aggressive bids, the incumbent and the other prospective bidding services providers must reasonably believe that the customer has adequate time to migrate its services to one or more successor carriers in order to avoid the sharp increase in rates that typically occurs as the current agreement with incumbent carrier expires.

    As a rule, new or updated agreements should be executed no later than six months prior to expiration of the current agreement, exclusive of that agreement's transition period. Thus, the Planning phase should be completed 12 months prior to contract expiration and the RFP released within two months thereof. A customer's bargaining leverage declines progressively as slippage occurs in this schedule.

  2. Request for Proposal (Contents of the RFP and Review of Responses)

    Foremost, the RFP must provide an accurate depiction of the company's current services. This is often referred to as the demand set. This is true even if the Company is looking to migrate to new services or technologies or upgrade the bandwidths for existing services.

    At a minimum, the demand set includes the addresses for all customer locations to which special access services, such as DS-1s, DS-3s, and DSL services, interoffice data services such as frame relay service, and dedicated Internet access services will be provisioned. The RFP must include a thorough list of existing services broken down by generally recognized service categories, such as access circuits, frame relay service ports and permanent virtual circuits ("PVCs"), private line circuits, and dedicated Internet access services, and geographic scope or jurisdictions of the services- intrastate, interstate, international and global. Planned increases in bandwidths for access and data services should always be specified in the RFP.

    For voice services, the RFP should include at least a representative month's minutes of use ("MOUs") disaggregated among the five principal circuit-switched voice schedules, regardless of whether the customer is planning to migrate to VoIP services for some of these requirements. All NPAs and NXXs should be included, as well.

    The questions and requests for information in the RFP must be sufficiently disaggregated to permit an "apples for apples" comparison of the bidders' responses, and should obligate bidders to maintain the confidentiality the contents and customer information included in the RFP, confirm that the bidders bear all costs of preparing their responses, and state that the customer has complete discretion to reject all bids and discontinue the procurement at any time. On the other hand, we recommend against including a "best and final offer" requirement in the RFP. It is far better to preserve the flexibility to require the responsive bidders to "sharpen their pencils" through one or more sets of targeted, follow-up requests after the comprehensive responses to the RFP are submitted.

    Another best practice is that pricing for alternate network technologies such as basic frame relay service and IP-enabled frame relay service be requested, particularly if the customer is looking to migrate to the IP-enabled service. This practice compels the bidding vendors to disclose the cost savings (or lack thereof) associated with the reduced number of PVCs associated with the IP-enabled version of the service. All relevant Service Level Agreements and average installation times for major services should be requested, as well.

    We also recommend that clients include in the RFP the substance of preferred business and legal terms that should, ultimately, be incorporated in the agreement between the parties. At a minimum, these "business terms" should include the following:

    • Pricing be expressed as fixed, stabilized rates, as opposed to fixed discounts;
    • A 3-year term for the agreement with the option for two one-year renewal terms, and a price stabilized transition period of at least three months in order to ensure rate stability and assistance when transitioning to a successor carrier at the expiration or any earlier termination of the agreement; and
    • As desired, defined escalation procedures and remedies for service outages at critical customer locations.

    Perhaps, the most important business term to include in the RFP is the percentage of the projected expenditures that will be acceptable as either a Minimum Annual Commitment or an overall Term Commitment. This minimum purchase commitment is typically expressed in net dollars. Customers and services providers have diametrically opposed interests on this point. Even more so than rates, the minimum purchase commitment is often the most contentious issue of negotiations. The lower the commitment (as a percentage of projected expenditures) the more flexibility the customer has to migrate services without penalty to other vendors if service, support or pricing concerns arise. A lower commitment reduces the risk of the customer incurring a shortfall in the event of a business downturn. Conversely, a higher commitment benefits the services provider, providing a larger, reasonably assured revenue stream. Multiple provisions of the agreement are keyed to this minimum purchase commitment.

    Other points to include in the RFP are aggressive, yet realistic, timelines for migrating to replacement or new services. These timelines provide both the framework and the basis for "carrot and stick" incentives for the initial deployment and acceptance procedures for the carrier's newly installed services. These are particularly important when a successor carrier is selected as the preferred vendor. Some carriers have standard SLAs for on-time provisioning. The times and dates for site and service-specific installations are often included in an implementation plan that typically is finalized after the agreement is executed.

  3. Negotiating Agreements

    The services providers' standard agreements are written to protect their legal and economic interests, and the vendors typically insist on using their standard agreements as the basis for negotiations. While this is common practice in many industries, the extent of the one-sidedness in carriers' standard agreements is often surprising to procurement staff and counsel. On the other hand, the carriers fully expect that customers will look to balance the one-sided nature of their agreements, but the carriers hold particularly firm on the dollar limits on damages and extensive limitations of liability included in their standard agreements.

    On occasion, persistent customers succeed in substituting their standard agreements for the vendor's. Time and resource constraints generally militate against this approach. The process is facilitated and the customer's negotiating leverage is maximized by providing a comprehensive revision that incorporates all of the desired changes to the carrier's standard agreement, including the business and legal terms set out in the RFP. These realities underlie our best practice recommendations of providing adequate time to conduct the procurement and including priority business and legal terms in the RFP. All carriers tend to be more flexible on terms and conditions prior to being selected the preferred vendor.

    From the customer's perspective, two other considerations should be kept in mind in negotiating these agreements.

    • The agreements should include procedures for addressing the most common disputes that arise in connection with these agreements--billing disputes. We also recommend mediation or arbitration as mechanisms for resolving most disputes that arise under these agreements. Our logic is that the limited duration of these agreements and the nature of the disputes are best resolved through processes that are less time consuming and costly than conventional civil litigation.
    • The carriers tariff replacement documents, variously referred to as Service Guides, Schedules, or Guidebooks, (collectively "Service Guides,"), include standard terms and conditions, such as SLAs, service descriptions and standard price lists, and are incorporated by reference into these agreements. These documents, generally available on the carriers' web sites, are not the legal equivalents of tariffs-which always trump agreements between the parties. Thus, the agreement should be drafted to ensure that provisions in these Service Guides do not impose additional liabilities or obligations on the Customer or supersede the negotiated terms in the agreement between the parties.

  4. Initial Implementation, Service Ordering and Provisioning

    Cutting over to a successor carrier's services, migrating to a new data service, or increasing capacity on existing services to support additional applications are the among the most resource intensive events for a customer's telecom staff. Service installations and cut-overs become progressively more complicated as the number Customer locations increase. PVCs or routing tables for customer locations have to be coordinated and the service migration must be conducted in a systematic fashion based on the customer's priorities. The overarching considerations are to maintain connectivity, avoid disruption to the customer's business and minimize the cost of concurrent use of the incumbent provider's and successor's services.

    The interexchange carriers have historically taken the position that the details and obligations of the initial implementation should be "left to the implementation plan," and that the agreement should not expressly obligate the carrier to implement services within a defined period of time. We disagree, and regularly recommend that the initial service implementation be addressed in the agreement by setting installation and service delivery timelines, establishing the obligation that "consistent progress" be made toward meeting these timelines, and requiring escalation procedures if the carrier is falling behind in the deployment schedule. This recommendation is even more important in circumstances in which managed services and CPE are part of the procurement.

    Clearly, an implementation plan still is required to identify the key members of the customer's staff and those of the carrier, particularly the services provider's "project manager," to clarify responsibilities of the customer in regard to site preparation, and to schedule the sequencing of the service installations at customer sites.

    The carriers have streamlined their processes and are deploying web-based tools that the customer can use to track orders, provisioning and trouble resolution. The RFP should elicit reasonably detailed descriptions of these procedures and on-line tools, and these descriptions should be summarized in the agreement.

  5. Account Team Support and Performance Reviews, Rate Reviews and Technology

    Uplifts

    Large customers including energy industry companies require account team support in order to have a principal point of contact for on-going communications and to address the myriad of issues that can and do arise in connection with billing, provisioning and ordering of additional services. The carriers anticipate requests for clauses in the agreement that focus on account team support, including frequency of scheduled meetings, and a restatement of the customer's right to express concerns regarding the performance and behavior of the account team and other employees and contractors of the services provider. The obligation to conduct periodic performance and business relationship conferences with carrier management or product specialists are also commonly included in services agreements.

    Competitive pricing review clauses have been included in services agreements for years. The process has become more challenging for customers because the rates, terms and conditions of customer-specific arrangements for regulated telecommunications services are no longer readily discernible from telecommunications carriers' on-line Service Guides. The rates for information services such as dedicated Internet access and network management services have never been subject to public disclosure obligations. Thus, clauses dealing with competitive pricing review obligations should provide the Customer the right to rely on reputable consultants to provide current pricing and marketplace trend data for the services subject to the agreement. Customer interests are better served by relying on general descriptions of comparable agreements and the process that the parties must follow in reaching agreement on price adjustments, if any. If the Customer has negotiated a modest minimum purchase commitment vis-à-vis its projected expenditures, it has the best leverage in securing warranted market-based adjustments in rates.

    Technology uplift clauses have also been part of services agreements for years, but today the ability to migrate to a different technology is particularly relevant because multiple technologies are available in the marketplace. The real issue with technology uplift clauses for the carriers is not the obligation or commitment to migrate to the new service or technology, but the impact on revenues and the recovery of non-recurring costs. Revenue neutral migrations are less problematic from services providers' perspective, but substantial cost savings as well as enhanced or new functionalities often underlie the customer's interest in migrating to a new service or technology. Again, if the customer has negotiated a modest minimum purchase commitment vis-à-vis its projected expenditures, it is in a far better position to secure the desired technology or replacement service.

  6. Strategies For Meeting International and Global Requirements

    For purposes of this paper, "international requirements" are broadly defined as requirements for voice or data services that originate in North America, particularly the United States, and terminate in other countries. "Global requirements" can be broadly defined as requirements for data or voice services that originate and terminate outside of North America. Generally speaking, "international requirements" are typically met by carrier-grade services provided through the established telecommunications infrastructure of the United States and of other countries. The principal domestic telecommunications carriers, such as AT&T, MCI and Sprint, have longstanding "correspondent relationships" with most foreign carriers and, increasingly, have their own infrastructure in Europe and Asia-Pac countries. The Service Guides of these domestic carriers have standard price lists and SLAs for many international services. These carriers regularly negotiate customer-specific pricing for voice and data services to most countries in the world.

    On the other hand, many international requirements of energy companies fall outside of established network infrastructures. When a company must secure a connection for voice and data requirements from Houston to a production platform 40 miles off of the coast of Indonesia or to platforms beyond the outer continental shelf in the Gulf of Mexico, the company must adopt a different procurement strategy. The major carriers may not even offer the service. We propose the following best practices be considered in procuring services to these remote locations.

    • A private infrastructure alternative should be considered.
    • Revenue commitments are revenue assurance vehicles for services providers, distinct from the often substantial nonrecurring charges incurred in establishing international circuits to remote locations.
    • The standard 3-year term and option for one or more one-year renewal terms may not apply to many of the these services requirements, however, six-month transition periods upon the expiration or an earlier termination of the arrangement should always be sought.
    • SLA compliance may be a greater challenge, but timely service installations are essential. Provisioning and trouble escalation procedures, trouble notification procedures and multiple points of contact with the services provider should be established and confirmed periodically.

    Procuring voice and data services between and among critical business locations in Europe, Asia-Pac and the rest of the world (global services) calls for a more flexible procurement approach. The familiar facilities-based, services provider model typically will not apply uniformly for global services. In some countries, services providers may not operate the underlying infrastructure. "Providers" of global services may provide services as resellers of underlying carriers' services or act more like agents of multiple foreign carriers. These providers may decline to accept responsibility for timely provisioning or to offer end-to end service SLAs, even though many of the larger global services providers are pushing for SLAs and service commitments that they can "flow-through" to their customers.

    As a general rule, the systematic approach outlined above applies to a substantial portion of these global requirements. We recommend that for global services for which the services provider offers facilities-based services or is willing to provide SLAs comparable to those that a facilities-based services provider would offer, agreements be structured consistent with the best practices recommended for domestic and international services. For countries in which the reseller or agent model applies, the customer should negotiate the right of partial discontinuance in the event services to one more countries are subject to significant chronic problems. And, if significant problems exist in multiple countries, the customer should have the right to terminate the entire agreement. The criteria triggering such a right likely should be negotiated on a case-by-case basis.

    Separate Agreements for Telecommunications and Network Management Services and Outsourcing Arrangements

    To the extent a company is seriously considering a substantial IT outsourcing arrangement, we recommend that telecommunications and network management services continue to be procured by the customer directly from telecommunications carriers, as opposed to obtaining these services through the outsourcing arrangement. For purposes of discussion, we define outsourcing arrangements as those involving the transfer of some IT or telecom personnel, IT assets such as data centers, data center CPU capacity, local area networks and CPE, and ongoing responsibility for various tasks such as desktop and local area network management.2

    Several reasons underlie our recommendation. Inasmuch as the outsourcing company is not "providing" the telecommunications and information services and may not even have its own staff or network operations center ("NOC") to provide the managed services, the "value-added" being provided by the outsourcing company is not apparent. In these instances, the outsourcer's potential profit for telecommunications and network management services is derived principally from the margin between the rates it pays the telecommunications carriers and the rates it charges to the customer.3 In addition, the term for outsourcing agreements tends to be longer, often up to ten years, as compared to the typical three-year term for telecommunications services agreements. A real question exists whether a ten-year deal with an outsourcing company, even with an aggressive competitive pricing review clause, will provide the same economic and technology benefits as direct negotiations every three to four years with the underlying services providers.

    Outsourcing companies may take a more limited approach and propose to provide only managed services and CPE, such as PBXs, routers and firewalls, and data center services. While the outsourcing company may be in a position to deliver lower overall costs for hardware, the question arises, again, regarding what services the outsourcer is providing directly. A compelling reason for including managed services and data center services in telecommunications services agreements is that in many instances it is the telecommunications carrier-not the outsourcing company--that provides the network management, i.e., monitoring the service and CPE, responding to troubles, doing software upgrades and managing the hardware maintenance providers.

    In some instances, the outsourcing company may be in a position to offer telecommunications and managed services at substantially better rates, terms and conditions as compared to an agreement that the customer can secure directly from its preferred carriers. If so, the customer should explore the option.

    1Assuming AT&T merges with SBC and MCI with Verizon, we believe mobile Wireless services and local exchange services will become core elements in many Services Procurements.

    2We distinguish comprehensive outsourcing arrangements from agreements between customers and vendors that focus principally on providing managed services for routers and firewalls. These vendors typically do not offer to bundle the underlying telecommunications and information services with their network services.

    3A different equation exists when a services company staffs some or all of the IT or Telecom positions within an organization with contract employees. In these instances, the company is replacing employees with contractors, focusing on the relative costs of personnel.