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Article : Front-end vs. Back-end Cost in Telecom Sourcing

By Justin Fuller, Vice-President of Analysis, G2, Inc.

That Recently Negotiated Contract May Not Produce As Much Savings As You Expected
Similar to buying a car with hidden fees like maintenance plans and creative financing, most telecom contracts have back-end costs that can significantly cut your savings. The carriers' contractual sticker-prices proclaim double-digit reductions knowing they will recover margin through utilizing methods and tactics that are rarely uncovered, acknowledged or challenged.

Carriers readily concede savings on high profile areas of your business to make their deals more attractive. They know these hidden methods will work to help regain what they lost.

The Carriers Will Recover Lost Margin Through Tactics And Techniques That Their Customers Cannot Easily Combat
The carriers rely upon their customers not having the means to analyze pricing and invoicing or to have the leverage and precedence to stop them from employing these methods. In our consulting practice, we routinely witness the carriers using the following tools to recover margin on the "back-end" of a new contract:

No detailed invoice reporting is available to break costs down to the lowest element in the carrier billing system with all net-effective rates.  Without this information, it is impossible to target all potential areas of rate reductions, accurately calculate savings and audit the implementation of new rates.

The carriers purposefully set high commitments compared to new run-rates. At best, the carriers have leverage to impose less favorable rates if commitments are not met. At worst, shortfall penalties.

Carriers focus on reductions for big ticket items, but then embed rate increases elsewhere within the hundreds of price points found within the contract. Here are some key points to keep in mind when negotiating a deal.

  • Carrier failure to keep customers in parody with the downward movement in the market. The longer the tenure with the carrier the further behind rates will be to the average deal. The carrier is rarely leveraged to provide the same aggressive price points they offer to a new customer.

  • Given the proper carrier precedence and leverage all feature charges can be waived.

  • The overcharging or passing through of taxes which is at the sole discretion of the carrier, not mandated.

  • Purposeful delays in the negotiation process and the implementation of the new contract rates result in months and months of higher margin retention.

  • Staggered contract end-dates (non-coterminous) and bifurcated service agreements preclude clients from leveraging business appropriately, thereby lowering the potential for deeper discounts.

  • Rate implementation errors which are never identified by the customer.

  • Inaccurate proposal savings analyses. In our nearly decade of analyzing proposals, we have yet to find one carrier-developed savings analysis that is accurate and not tilted in their favor.

As former carrier negotiators and professional consultants, we understand these tactics the carriers use to increase your costs. There are companies who build superior solutions within the negotiation process to eliminate the effectiveness of these back-end costs.

About G2, Inc:
Company LogoSince 2000, G2, Inc has provided Contract Negotiation services to Fortune 500 and Global 100 companies across all industries. G2, Inc’s clients are some of the most well-known names in business with telecom infrastructures spanning across the Americas, Europe and Asia Pacific.
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Today's Tip of the Day - Communication Is Key

Read today's tip or listen to it on podcast.

Published: Thursday, May 15, 2008

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