Leveraging Better Communications DealsLeveraging Better Communications Deals

Remember, the best deals go to the best negotiators--not the biggest spenders.

Developing successful communications agreements can be painful. The enterprise needs leverage to ensure that there is some push-back against the provider that will help avoid one-sided agreements.

The least leverage is when there is only one or two months before the existing agreement finishes. The incumbent provider is in a very strong position to leverage against the enterprise, and competitors have little time to negotiate favorable deals.

These and other comments were presented at the 22nd Annual Negotiate Enterprise Communications Deals conference held April 30 to May 2 in Washington, DC. One of the sessions was titled "Leverage and the Successful Negotiation," presented by Hank Levine of Levine, Blaszak, Block & Boothby LLC (LB3), and Jack Deal and Joe Schmidt of TechCaliber Consulting (TC2). This article summarizes many of their recommendations:

According to Levine, Deal and Schmidt, leverage in communications negotiations increases during the term of the contract in favor of the enterprise--up to a point. In a multi-year contract, leverage for the enterprise peaks about six months before the contract ending date. After this time, the leverage moves very quickly in favor of the communications provider.

Leverage Comes From:
• Establishing a believable and credible threat that the enterprise will leave the provider and move the business elsewhere.
• Actions that support the threat, not just words
• Producing a history of following through on the threat
• Conducting a true competitive procurement
• Moving traffic from the incumbent provider to a competitor
• Negotiating a buffer between what you commit to and what you are spending (the greater the buffer, the greater the leverage)
• Creating a deal structure that supports all of the above

Leverage Does Not Come From:
• The size of the enterprise or its communications budget
• A strategic partnership with the provider (this is more of a lock-in)
• Looking only to the next quarter for cost reduction (it should be a long-term view)
• Announcing a deadline for closing the deal

The Provider's Positions
A provider is in the business of creating revenue and profit, especially profit. The poorer the deal for the enterprise, the higher the provider profit. In other words, the provider's sales force are given incentives to craft the least favorable deal for the enterprise.

Providers often will tell you that the higher the commitment level, traffic or financial spend, the better the deal. Levine, Deal and Schmidt emphasized that this is not true. Providers are looking for a captive customer, one that is locked in for the term of the contract. This capture allows the provider to manipulate the enterprise for charges and changes that will occur during the term of the contract.

The provider knows that an enterprise may not be able to weather economic uncertainties or transformational changes. The provider wants a contract that will shield them from the risks that may occur as the enterprise performs its business functions. High commitments (80% to 90%) of the spend shield the provider. Lower commitments change the provider behavior, benefiting the enterprise.

Some Comments on Commitments
The LB3/TC2 speakers noted that often, the provider will imply that high commitment levels equal lower cost. However, many providers will accept a 50% to 60% commitment level, which leaves the enterprise in a good position. If the commitment is paid off about the middle of the contract term, then the enterprise can theoretically terminate the contract or move traffic to another provider with little or no financial penalty.

Providers vary around the world, but it is common practice for domestic providers to push for high commitment levels. Term commitments should be your best practice, and they are achievable from most providers.

If you have negotiated a low commitment level with the incumbent, you can do it again. You can also use the existing commitment agreement with an incumbent to force a competitor to offer the same or better commitment level.

According to the LB3/TC2 speakers, there is even a possibility to create a contract with no commitment. Tier 2 providers are more likely to agree to a no-commitment contract. But the speakers cautioned that the provider may want per-circuit commitments, in which each circuit would have to be dealt with individually.

As Hank Levine said, "This is death by a thousand cuts." There may be hefty early termination fees. If you have received revenue incentives, you may have also agreed to payback provisions, negating the revenue incentives.

Some Unconventional Tactics
Remember that the provider's negotiation team is paid and rewarded well if the deal strongly favors the provider. No matter how friendly, the provider team members are not your friends. This is a business transaction. Levine, Deal and Schmidt suggested some of the tactics below to to move the incumbent and their competitors to negotiate more favorably:

• Invite the largest number of possible providers to the bidder's conference. A big audience can intimidate the incumbent as well as the competitors.

• Confidently announce at the conference that you are willing to work with multiple providers if no single provider can satisfy your requirements.

• Get several business cards from possible providers. Write short, favorable notes on the competitor business cards, and leave them around the conference room when speaking to the incumbent and the strongest competitors.

Never Never Ever
You have no leverage and therefore cannot expect a good deal if you are in the last 1 or 2 months of the end of the present contract--so don't wait to get to this point. Don't ever say to the incumbent that you want to continue with them. Make no assumptions that the new contract will look very much like the old contract. Competition produces new and sometimes unknown contract provisions that the provider may have agreed to with other enterprises.

Getting Super Bowl or Pebble Beach tickets should not be an influence. It has happened more than once that a C-level executive has agreed on contract terms, especially with the incumbent provider, that are not competitive because the C-level executive does not know the industry well enough. If a C-level executive does make a deal unknown to the negotiating team, court cases have sided with the C-level agreement against the enterprise's negotiation team. The enterprise has to pay the higher charges and live with the C-level's commitments.