Mike Benson wasn’t looking forward to negotiating his new telecom contract. The CIO of DirecTV had invited his existing provider, AT&T, along with rivals Sprint and Verizon, to bid on DirecTV’s new contracts for 2006. Benson wasn’t just negotiating for the satellite TV company’s local and long-distance communication needs but for all of its voice, data and networking services.
Not only would he have to untangle the telecom carriers’ incredibly complicated pricing on current services, but he would have to figure out which could offer the best deal on new networking technologies such as VoIP telephony and multiprotocol label switching, or MPLS. And he knew that if he switched from AT&T to a different company, it could take up to two years to complete the transition.
“[The carriers] will assure you the migration will be fine,” Benson says. “But in reality something will always go wrong.”
Making the right decision is a big load on Benson’s mind. And he is not alone. Now that telecom and IT have converged of late into networked IT services, the responsibility for negotiating and managing telecom contracts in an increasing number of companies has fallen to the CIO. And many are not prepared for the challenge. According to a survey of IT execs enrolled in The Ohio State University’s CIO Solutions Gallery program, telecom contracts are the source of most CIOs’ greatest long-term strategic confusion and biggest all-around tactical, day-to-day administrative frustration. And they openly acknowledge it is their sector of greatest ignorance.
To make matters worse, the telecom arena has never been so chaotic. Deregulation has created a thicket of carriers offering long-distance, local, wireless and networking services at unpredictable rates. These carriers use dozens of different billing formats, and CIOs regularly complain about errors and overcharges.
While the past year has seen unprecedented megamergers, most notably the marriage of SBC and AT&T, these M&As have done little to clear up the confusion. The costs to corporate America couldn’t be higher, in large part because the networking services offered under the telecom umbrella are more sophisticated—and more crucial to enterprises’ day-to-day operations—than ever before. “Many people think of telecom as a cost, and it is, but it provides a function we can’t live without,” says Lisa Pierce, vice president of telecom and networks at Forrester Research.
According to Aberdeen Group, the average Fortune 500 company spends $116 million each year on telecom services (for mid-market enterprises, it’s $26 million). According to several telecom sources, telecom costs have jumped into the top three line items for most companies. In addition, up to 12 percent of telecom service expenses are erroneous. Such errors result in an estimated $8 million a year in lost profits per company, according to Aberdeen Group.
“It’s not hyperbole to state that networks and telecom are the worst managed function in IT,” says Eric Goodness, a research VP for managed and professional network services at Gartner. “There’s anarchy and a total lack of governance.”
But a few CIOs have found a path through the telecom jungle. Some have turned to third-party telecom expense management vendors, or TEMs, that know the lay of the land and can help CIOs through contract negotiations and billing problems. Others are saving on long-distance telecom costs by rolling out small-scale VoIP deployments. CIOs and analysts interviewed for this article offer valuable insights and examples of how they’re contending with the spiraling costs of today’s telecom.
If CIOs don’t grab control over their telecom spend now, “they will be behind the eight ball,” says John Nallin, the vice president at UPS in charge of worldwide telecommunications. “The best defense is a good offense.”
For nearly 100 years, there wasn’t much to managing telecom. AT&T’s Bell System had a monopoly on everything, and its prices were, for the most part, nonnegotiable. The breakup of AT&T in 1984 and deregulation of telecommunications in 1996 ushered in a new era. Copper changed to fiber. Network capabilities expanded. And IP became the de facto networking standard in the Internet age.
Along with new choices came new complexities: dozens of telecom suppliers offering local, long distance, wireless and networking services at various prices in a bewildering array of billing formats. For the most part, though, the brand-new competition led to consistent reductions in telecom spending every year.
Within the past 10 years, however, the telecom landscape shifted once more, and no event was more jolting than when the IT department and the telecom folks entered into a sort of arranged marriage. Because IT ran data networks, and telecom carriers were increasingly providing network-based services (for WANs and LANs), and voice could now run over networks (VoIP), all of telecom was rolled under IT’s umbrella. Networking became even more critical—computers that can’t talk to each other are essentially useless—and CIOs set out to upgrade their network infrastructures to keep up.
For some enterprises, the process of upgrading their networks has become a Sisyphean task. “It’s like painting the George Washington Bridge,” says UPS’s Nallin. “When we get three-quarters of the way down the bridge, and we look back, we know we’re going to have to start painting it again when we get done.”
Carriers themselves are still operating with legacy databases and networks that were designed to carry only basic telecom services. Today, telcos are still trying to upgrade their systems to efficiently transport today’s data, voice and video offerings to keep pace with new competitors. (Verizon, for one, is spending $20 billion on its fiber-optic overhaul.)
Threats to carriers’ once-protected revenue streams are everywhere—from VoIP companies such as Skype and Vonage to cable providers such as Comcast and Time Warner. And then there are the IBMs, CSCs and EDSs of the world that offer an outsourced pain reliever for all CIOs’ telecom headaches.
“There’s tremendous confusion in the marketplace with all of this consolidation,” says James M. Smith, a telecommunications attorney at Davis Wright Tremaine and a former telecom executive. “For CIOs, the question becomes, What does the future bring, and which horse to ride? Go with the blue chips or go with the Vonages?”
Even today, CIOs still fight the entrenched executive view that telecom costs should always decrease. What CEOs and CFOs don’t necessarily understand is that the enormous productivity and efficiency gains they’ve seen in their enterprises in recent years have been an outgrowth of the new networked telecom infrastructure. And their networks’ bandwidth needs will only continue to grow, putting added pressure on CIOs to explain why telecom is so vital to the company’s future.
“The networks are the veins of the company, and we’re bandwidth junkies,” says the global network manager at a worldwide manufacturer of retail goods. “We’re a company that lives and dies on top of [the carriers’] services.”
The Devil Is in the (Pricing) Details
The vexing challenge for CIOs in this new era is figuring out just how much telecom rates should be, and then negotiating fair deals with the plethora of providers that offer various networked services. Telecom contracts, which can contain hundreds of pages of obscure terminology and restrictions, can confuse even the most legal-minded CIO. “Sorting out the legal gobbledygook to get a contract on anything [related to telecom] takes as long as it does to put the project in,” UPS’s Nallin says.
Prices can vary widely between service providers, and CIOs have no way of knowing whether the prices they are being quoted by various carriers are competitive or fair. “What becomes difficult is how do you stay current with the new rate structures and contracting approaches,” says Tom Lesica, senior vice president for global information technology and business operations at Avaya. Lesica just went through an RFP with the carriers that included 12 telecom services. “It’s difficult for me or for my team to constantly go through the day-to-day, week-to-week fluctuations [in prices],” he says.
One carrier tactic that muddies the waters is called margin balancing. The telecom carrier will give the CIO a low rate on an 800-number, but not point out that the rate being quoted on something else (such as data services) is actually 40 percent above the going rate. “It’s difficult to know the price points that CIOs should be aiming for,” says Charlotte Yates, CEO of Telwares, a company that specializes in telecom contract negotiations and maintains historical data on carrier rates. “You might as well have a dartboard.”
For guidance, companies used to be able to look to Deal Watch, a compendium of carrier rates published by the Center for Communications Management Information (CCMI). Publication ceased last year because carriers stopped providing specifics—only wide ranges on services, such as voice and frame relay, even though the Federal Communications Commission requires rate disclosure. According to Bill Goddard, product manager at CCMI, the range of rates on frame-relay service, for example, can run anywhere from $32 to $40,180 per month. (To see a comparison of AT&T’s publicly disclosed rate contracts, go to www.cio.com/ 031506). “They’re posting data publicly, but it’s absolutely no use to anyone,” he says. The carriers are able to get around the FCC requirement that they must “publicly disclose” their rates because that term is so unclear. CCMI filed a formal complaint with the FCC, and it’s still waiting for an answer. “The FCC has stuck its head in the sand and wrote a nebulous order and is not particularly stringent about the enforcement,” Goddard says. “As an end user it becomes extremely difficult to determine what the market rates are.”
Not only can executives no longer get comparative pricing information but in some cases carriers have actually inserted legalese into the contracts to block CIOs from comparing their telecom rates with other CIOs and then bringing those rates to the carriers’ attention during negotiations, according to Yates. CIOs should be alert to such clauses because talking to your colleagues is one of the best means of obtaining comparative pricing data.
CIOs may believe that the more services you purchase from one vendor, the lower the rate it will quote you. But experts say that is not so. Telwares’ data shows that small companies receive just as many lower-priced deals as the big boys do. Therefore, going with one carrier isn’t always the best solution for large enterprises.
Carriers say that they’re not out to deceive their customers. “It’s possible that I could trick a customer [during contract negotiations],” says John Irwin, vice president and general manager of BellSouth Business, but he says he knows he’ll lose such customers when they figure it out. There’s very little loyalty in telecom to begin with. As for the negotiations, Irwin says his customers rarely pay the “sticker price.” CIOs might not always hit their ideal, Irwin says, “but they’re going to be in spittin’ distance.”
However, Irwin does acknowledge the difficulty of the CIO’s negotiation position. “Probably there’s no foolproof way to make sure that [CIOs] are getting the best deal possible,” he says.
How to Avoid the Billing Quagmire
Because they deal with so many carriers for networked IT services, companies big and small are awash in telecom bills. According to Aberdeen Group, the average mid-market enterprise processes more than 3,000 telecom-related bills per year; for the average Fortune 500 company, it’s 15,000. The cost of just processing these bills (with no auditing for errors) is $9 to $15 per invoice. Conservatively, this equates to an average of $135,000 in processing costs for big companies and $27,000 at midsize companies—and that’s just to keep on top of the volume.
Now think about this: Gartner estimates that up to 14 percent of telecom charges are in error. Finding those errors (think needle in a haystack) and getting the carriers to reimburse your account is arduous. Meta Group says 20 percent of the problem is finding the error; 80 percent is getting the carrier to pay up. Carriers are even imposing a statute of limitations on their customers seeking compensation for billing errors. Basically, if you can’t find the billing error (say a telecom service was ordered but wasn’t installed correctly) within a certain time frame—say, three months—you can’t get that money back from some carriers.
In order to process an invoice, telecom analysts need to look over each bill (some on paper, some on CD-ROM) and audit it against terms of the contracts as well as against tariff and service guidelines, tax charges and physical telecom inventories such as the number of circuits. Every month. A VP of telecom procurement at a global financial services company says her division alone receives 7,000 to 8,000 bills per month.
“And we are one of many divisions,” says the woman, who asked not to be identified. Her company has outsourced, insourced and outsourced again the billing and expense management. Her group would need about 20 or so full-time staffers to scrutinize and pay telecom bills in-house, she estimates.
According to TEM vendor Control Point Solutions, simple billing errors can take 60 to 120 days to resolve with carriers. Examples: A special contract price is not applied to a service; circuits or phone lines are taken out of service but never removed from billing; and a company is double-taxed on multistate services.
Complex billing errors can take much longer to resolve. For example, say one company acquires another. The acquiring company must notify the telecom provider and request that the acquired company have all its billing tied to the master service agreement of the acquirer in order to get the same discounts and pricing. It can take up to a year to ensure that all billing and documentation is correct and that the carrier doesn’t slap the acquiree with early cancellation and other commitment penalties, according to Control Point.
For a public company, there are key cutoff dates when accounting needs to report finances for the quarterly statements. If there are outstanding expenses that suppliers haven’t sent the company, accounting folks must estimate that amount. Processing telecom invoices (which come at varying times during the month) along with billing disputes and outstanding credits are huge problems because those can produce significant revenue swings. And CIOs bear the brunt of the finance department’s frustrations.
“I’m getting the tar beaten out of me” by the finance staff, says the global network manager at the worldwide manufacturer of retail goods. “Finance says, ‘Dammit, why can’t you do it month-to-month properly? It’s $200,000 one month; the next month it’s $100,000.’”
How to Fight Back
Despite all the heartburn, CIOs do have some alternatives for restoring sanity to their telecom situation. Now is the time, for instance, to lean on the carrier relationships you’ve developed over the years. “The merged companies don’t want to sit by the wayside and see their customers being taken away from them,” says UPS’s Nallin.
Other IT execs and telecom analysts concur that now is a perfect time to play vendors against each other (as well as the cable companies) in negotiations. The global network manager of the retail goods manufacturer, who asked not to be identified, recently de-installed some carrier services in his U.S. operations and had Time Warner Telecom fulfill them. And that got his previous carriers’ attention.
CIOs have to use “the threat of moving away as a tool for leverage,” agrees Jan Dawson, a research director with Ovum. He suggests that CIOs demand an annual review of pricing with each carrier and how those prices benchmark against the carrier’s competitors.
It’s incumbent on CIOs to spread their services to various players to get the best deal. “One vendor doesn’t provide all of the services,” says UPS’s Nallin. “They just can’t handle all of the coverage.”
To help him navigate through the telecom minefield, DirecTV’s Benson retained one of a growing legion of telecom expense management vendors. Benson’s reasoning is simple: “I don’t know what everyone else is paying,” he says. According to a report from Forrester’s Pierce, most TEMs offer provider selection and contract negotiation; onetime and ongoing bill audits and bill verification; inventory cleanup; bill dispute and credit resolution; bill payment; orders, changes and disconnects; and more. Some of the bigger players are Avotus, Control Point Solutions, MBG, ProfitLine and Vercuity (which owns Telwares).
Benson uses Telwares for his up-front contract negotiations. “They know what the going rates are,” he says. Telwares also preps him for the negotiations: who he is likely to negotiate with, who the true decision-maker inside the telecom company is and how that person will react to what he says. He also has used Telwares in the past for some onetime bill audits, though he keeps the back-end bill payment duties in-house.
Like all outsourcing arrangements in a nascent industry, there are danger zones. Forrester’s Pierce calls the growing use of TEM companies a “pit of vipers” because engagements can quickly lead to massive scope creep once the TEM gets inside an enterprise. So first, CIOs need to ask themselves what is the specific telecom problem they are trying to solve. Then craft an RFP around those deliverables and make sure the TEM can realistically fulfill their wants and needs.
Though it seems obvious, CIOs need to check client references from the TEM company, and if a TEM company’s bid is 50 percent less than everybody else’s, CIOs should look to another TEM provider, Gartner’s Goodness says. “A lot of [companies] have had bad experiences with [TEM providers],” he adds. Most bad experiences involve TEMs that overpromised on their capabilities and couldn’t deliver the trumpeted savings.
UPS’s Nallin has met with more than 20 telecom expense management vendors but ultimately declined their services. Instead he belongs to an ad hoc consortium of similarly sized companies that share information and benchmark rates for services “so we know we’re in the ballpark,” he says.
Once CIOs figure out how to negotiate telecom contracts, they should still expect a steep learning curve with all the new network technologies coming down the pike. It is now up to the CIO and his network managers to figure out how to make VoIP and other cutting-edge technologies work—from a bandwidth, security and financial perspective—and achieve all the hyped savings. As they struggle to do that, CIOs have quickly learned that bandwidth constraint is a major problem. “We’re always battling for bandwidth at different periods of time during each day,” says Nallin. “To manage that is a pain in the butt.”
With all of that network complexity, changing service providers isn’t like switching your long-distance service. (If CIOs decide to part ways early, expect to pay a substantial price to get out of the deal.) “As you move to more IT-based technologies, and you do VoIP and have a lot of applications dependent on the network, it’s more difficult to switch out,” says DirecTV’s Benson, who at press time hadn’t decided which carriers he would go with.
CIOs can turn to a carrier or outsourcer such as EDS or IBM to host the VoIP service. “Hosted telephony puts the responsibility back on the carrier or outsourcer,” Goodness says. He notes that there’s more risk in operating your own network. “If you run the best network in the world, you’re not going to get that much of an attaboy,” he says. “If the network goes down, you’re out of a job.”
For better or worse, carriers are going to play a big role in all CIOs’ futures. It is, therefore, up to each executive to figure out a telecom strategy that maximizes his IT infrastructure’s capabilities, keeps end users happy and doesn’t break the bank. Which is no easy task in 2006. As UPS’s Nallin notes, the CIO’s success with the carriers will depend on whether “the vendor is managing you, or are you managing the vendor?”¿