The Case Against Zero-Based BudgetingThe Case Against Zero-Based Budgeting

Practical experience suggests that amending a legacy telecom contract, even with its terms and conditions, is the wiser move than starting afresh.

When applied to telecom agreements, the concept of "zero-based budgeting" basically means that you start from scratch. Rather than improving, modifying, or renegotiating the language of existing contracts, you must largely define a new scope of services, SLAs, and terms and conditions given the desire to commit to minimal term and financial commitments with your carriers of choice. Proponents argue that this approach simplifies integration of new services, eases the transition from legacy technology, and gives clients flexibility and leverage. Not so fast...

While the idea of taking a clean-slate approach to contracting may sound appealing, practical experience suggests that a negotiation strategy focused on renegotiation and amending of existing agreements and commitments will be consistently more effective and almost always yield greater results.

For one thing, zero-based budgeting is simply not realistic. The traditional model of three-year telecom contracting is deeply entrenched, and the major telecom carriers won't accept an agreement without any financial or term commitment -- they just don't operate that way. While third-tier or niche players and resellers may dangle no-commitment incentives to win business, their rates are rarely market-based, and Fortune 1000 companies that want the flexibility will often pay a steep price to get it.

Capitalizing on the Soft Spot
You may consider term commitments to be onerous and constraining, but they do have their advantages. For one thing, carriers will offer better pricing and terms when they see some level of commitment in kind. In addition, terms can be powerful incentives for carriers seeking to protect specific product margins and the overall profitability of a deal. The longer the commitment, the more they are willing to write down lucrative product-specific margins. For enterprises, the key is to find the soft spot and capitalize on it and achieve market-based, incremental improvements.

Another benefit of amending legacy agreements is to protect terms that are favorable to you as the customer. Examples include extended billing and payment terms, billing review and error clauses, favorable credit treatment, and ramp-down and termination clauses. While carriers will always attempt to adjust contract terms in their favor, a well-defined contract strategy can give enterprises the best of both worlds -- market-leading current terms and optimal specific terms from their legacy agreements.

An effective contract amendment and renegotiation strategy also can enhance flexibility. Clients can reduce commitments to leverage competition, which can bring in new suppliers for specific services and avoid the risks of being single threaded.

As for technology innovation and transformation, all carriers seek the big margins they can draw from implementing newer technologies, like cloud solutions. And while a start-from-scratch contract may seem like the best way to make the leap to a new platform, in reality no enterprise can transform overnight, and you need the protections embedded in legacy contracts, while adding the flexibility to transform technology over time.

The Makings of a Favorable Contract
To be viable, a contract amendment strategy must be based on current market knowledge, insight into the technology landscape, and access to relevant pricing data. High-level characteristics of a favorable contract include a three-year term with 60% to 75% net expenditure commitment over time (versus annually), along with a specific set of fixed and postalized pricing elements. A mid-term rate review is essential to respond to market changes and maximize savings potential and maneuverability throughout the contract cycle.

More specifically, leveraging 25 to 30 standard industry best practices for key terms and conditions is imperative. Examples of favorable terms enterprises can introduce include a strong rate review with a penalty for non-compliance, minimal circuit term requirements (with none extending beyond one year) and spend commitments based on the total contract value rather than annual spend. Also important are unilateral term extensions and ramp-down clauses, enabling the enterprise to choose when and how to scale up or down, or extend terms.

An informed approach also can ensure the avoidance of onerous terms: these include commitments extending longer than 36 months and individual circuit terms longer than 12 months, and rate-recovery language going back only 60 days rather than six to 12 months. Weak or non-existent rate review clauses are another problem, as they leave an enterprise powerless to make adjustments in response to changes in market standards.

While industry best practices can be clearly defined and applied broadly across different enterprises, the trouble is that the specific terms and conditions of individual contracts are often highly bespoke and reflective of enterprise-specific idiosyncrasies, rather than the overarching guidelines that define a successful contract. As a result, enterprises struggle to separate the wheat from the chaff to understand what they should be asking for and what red flags to avoid.

Today's telecom landscape changes every nine to 12 months, while contracts are typically renegotiated only every 30 to 36 months. While keeping up with the rapid pace of change presents a challenge, enterprises can effectively leverage a legacy contract strategy by using current market intelligence and a clear set of financial, contractual and technical priorities to achieve a positive business outcome.

Phil Hugus is a managing director with Alsbridge, a global consulting and advisory services firm.