by Lorraine Cosgrove Ware

Consolidate Network Contracts to Cut Costs

Jul 01, 20013 mins

Your company’s contracts for voice and data networking services should be one of the first places you check to cut costs. Two places to find savings: consolidating a number of contracts into fewer to maximize potential discounts, and negotiating service-level guarantees that include penalties for your provider’s service failures.

The charts below illustrate in simple terms the savings you could find. Gartner compiled a set of factors it recommends information technology executives consider when negotiating service-level agreements for network availability, service quality and repair. Companies’ spending on these communications services varies, reports Gartner Vice President David Niel. But looking at the number of vendors you use and these service-level conditions could help your company’s overall cost-cutting efforts.

Two Ways to Reduce Networking Expenses

1 Consolidate Contracts

There’s money to be saved in eliminating duplicative network service provider agreements (see example at right). With commodity-type services, such as long distance or cellular voice communications, changing service providers is relatively easy. This option of changing providers can be held as a bargaining chip to encourage your primary network service provider to consolidate billing.

Source: Gartner Research Note COM-13-2137 March 9, 2001

Example Of Savings

For a company with $1 billion in revenue

Typical network Services spending: $2,000,000
Apply 10% discount by consolidating: x 0.10
Savings to bottom line: $200,000

2 negotiate Service-Level Agreements

Here’s a list of recommended credits for network service providers’ noncompliance

Service-level agreement Target Penalty
Network availability 99.8-99.99% 10% to 25%
Network latency (one way) 55-70 milliseconds 50% to 100%
Mean time to repair 4 hours 25% to 100%
Data delivery ratio 99.99% 50% to 100%

Spending varies, but looking at the vendors you use and the service conditions could help your cost-cutting efforts.

Best Practices

1. Strike a balance between too many and too few vendors. You don’t want to rely on only one network services provider (what if it has a severe outage?). But it’s a good idea to check all your contracts for redundancies, especially if your company has added many satellite offices. Savings can also come from using the same vendor for both data and voice networks.

2. Demand price protection. Include conditions in your contracts to lower your costs when rates go down. Communications prices such as long distance have dropped in the past few years. Make sure you’re not paying older, higher rates. Also look to include language that gives you room to grow as your company grows.

3. Strike a deal for service. Make sure your contracts include provisions that cover quality of networking service, reliability and what happens when something goes wrong. For example, Niel says, companies should negotiate a clause for “time to repair”?the time it takes a vendor to repair outages or other service problems. Vendors should agree to pay penalties for noncompliance.

4. Review your contracts annually.