Come Here Watson, I need you more than ever!

March 15, 1998

A driver in the middle of nowhere ponders which way to go. The road is unmarked. The terrain appears rough. Which way should he turn?

A CIO, like that driver at an unmarked intersection, must look in every direction before deciding which route to take in the quest for telecom services. And the CIO at the wheel had better make the decision quickly. In the back seat a bunch of cranky kids who look a lot like business executives are screaming, “Are we there yet?”

Before stepping on the gas or turning the wheel, an information executive faced with the job of procuring telecom services needs to do three things: determine the enterprise’s strategic direction, guarantee that someone in the IT shop knows enough about telecom technology to make a savvy decision and divide the enterprise’s telecom needs in terms of voice and data.

Without knowing what the company envisions its strategic destination to be, it will be hard for anyone to negotiate with suppliers over the long term, says Robert M. Rubin, vice president and CIO of Elf Atochem North America Inc., a $2 billion chemical company based in Philadelphia. (Rubin also serves on CIO’s board of advisors.) Elf Atochem needs to communicate quickly and efficiently with its customers around the world. To fulfill that strategic goal, Rubin chose to install an EDI platform in addition to SAP. He knew enough to reject high-speed technology such as cable modems. Instead, he chose frame relay to carry data and T1 lines to carry voice. The two technologies proved adequate to their respective tasks. “Our transmission volumes didn’t warrant the use of higher-bandwidth technologies,” Rubin explains.

While Rubin may be knowledgeable enough to put all the pieces together, many CIOs feel as though they are drinking from a fire hose of technical information. Do they need to be technical gurus to buy telecom services? “I may not be an expert when it comes to talking about the inner workings of some box, but I make sure someone on my staff is,” says Jonathan C. Fornaci, vice president and chief technology and information officer at Genstar Container Corp., a San Francisco-based General Electric Capital company whose core business is leasing marine containers worldwide.

On the other hand, being a technical savant can sometimes be a disadvantage, according to Tom Nolle, president of CIMI Corp., a technology assessment firm in Voorhees, N.J. “If you try to get too technical in selecting carrier services, you accept responsibility for whatever meets that specification,” says Nolle. He recommends that information executives, when talking to vendors, avoid technospeak and focus on managerial considerations.

The third step in choosing a route to telecom procurement is to divide business functions into voice and data. That discrimination requires familiarity with the fine points of a company’s service needs. “Keep drilling down because pricing is predicated on those details,” says Kenneth G. McGee, vice president and research director at Gartner Group Inc., a research firm in Stamford, Conn.

Search for Service

Once a destination is chosen, the problem of selecting a road remains. Some consultants recommend sticking with one telecommunications carrier for all needs, while others suggest bringing in multiple providers. Nolle suggests the single supplier route. “You already know their performance, so getting into bed with them some more won’t hurt,” he says.

But for large global companies, the single supplier route is not always the road most traveled. With a network that has connections into 31 countries, New York City-based Ernst & Young International Ltd., for example, allocates its telecom and data services through Equant Network Services and GlobalOne–the consortium of Sprint Communications Co. LP, Deutsche Telekom and France Telecom. Equant provides Ernst & Young with an international dial–in service that lets all its employees who frequently travel call their offices regardless of where they are. GlobalOne installs and manages Ernst & Young’s worldwide network connections. Meanwhile, Ernst & Young manages its higher-level functions, such as the Lotus Notes replication service as well as certain aspects of the EY/Link network management. “For those functions, we need people who are knowledgeable about our organization and our applications,” says Malcolm Collingwood, director of international communications services at Ernst & Young International in New York.

Bundling services with one provider clearly isn’t for everyone. All those eggs in a single basket leaves some people nervous. “[Bundling services] is good to the extent that it doesn’t affect the reliability of the service,” says Jerry Smith, senior vice president of network services at UMB Bank in Kansas City, Mo. “[But] if I bundle with one vendor and its service goes down, it could affect our [entire] enterprise.” Last summer, UMB installed a wide area network, using frame relay to link all facilities to the main branch in Kansas City. UMB divides its telecom needs among three providers: AT&T Corp. to manage most of its data needs, Sprint to manage its voice service and Netcom On-Line Communications Services Inc., based in San Jose, Calif., for its Internet access.

The three-way split was made over the course of two years. It was cheaper to go three ways, says Smith, who adds that the contracts were set before he joined the bank. He said the decision to go with a separate Internet service provider was based on Netcom’s reputation. “At that time, telecom carriers could not provide stable Internet connectivity, and Netcom was one of the first big players.” Smith says that when the time comes, he may allocate most of UMB’s telecom needs to a primary telecom provider and use another vendor for services such as bandwidth on demand.

Outsource It?

While many companies have always used the major telecommunications carriers to manage their voice networks, more and more are also outsourcing their data needs so that they can focus on their core business strategies.

In addition to voice, the major telecommunications carriers and local Bell operators offer data services ranging from e-mail to Web site hosting and development to Internet access to wireless communications. Computer companies such as IBM Corp., Hewlett-Packard Co. and Amdahl Corp. also have telecom outsourcing businesses, and a number of reliable systems integrators, such as Electronic Data Systems Corp. in Plano, Texas, offer telecom services. All that competition puts the buyers in a comfortable position. “If I have a circuit with AT&T and there is a hardware failure that attaches to that circuit, IBM handles it,” says Smith. IBM manages UMB’s hardware support for more than 145 remote branches in the Midwest.

Even the utility companies are getting into the act. Norweb Communications of Great Britain, a business unit of United Utilities PLC, is working with Northern Telecom, based in Richardson, Texas, on technology that will allow data to be transmitted over electric power lines into homes at speeds of more than 1Mbps. Because electric lines are ubiquitous, this is an attractive option for businesses that endorse telecommuting. Test trials were completed in the United Kingdom in October 1997, with trials slated for the U.S. market sometime in 1998.

For Houston-based Lyondell Petrochemical Co., expanding business drove the need to outsource. The $5 billion petrochemical company had previously charged two people with managing eight sites with 2,700 connections on Lyondell’s own network “Managing that large an infrastructure with two people was unheard of,” says Sanjay Chadha, manager of technology planning and evaluations at Lyondell. Rather than creating an army of people in-house, Lyondell offloaded various processes to a number of partners. Lyondell uses St. Louis, Mo.-based Southwestern Bell to install and manage its point-to-point connections and is working with AT&T on ways to access AT&T’s private network for global growth. PSINet Inc., headquartered in Herndon, Va., provides Lyondell with local Internet access through a local Internet service provider (ISP) in Texas. Multiple partners equal special treatment, says Chadha. “Having Southwestern Bell do only our wiring frees them up to act quickly on short notice,” he says. The carrier was able to work with Lyondell on designing a custom high-speed fiber-distributed data interface (FDDI) network across Lyondell’s offices in Houston that could connect to Lyondell’s vendors, many of which have FDDI networks.

Final Considerations

Before signing on the dotted line, there are some points to raise with potential telecom partners.

• Speed. “If it’s going to take six months to implement a major initiative in a certain part of the world, the need for that initiative could have come and gone by then,” says Collingwood.
• Costs. Unlike for cars, there is no Blue Book when it comes to buying telecom services. Therefore, talk to providers about their cost structures. “They have a lot of room to negotiate,” says Tod Dixon, former vice president of information technology with Northeast Utilities Electrical System in Berlin, Conn. The cost for a carrier to add a user to its service, assuming the carrier has spare capacity, is negligible, according to Dixon. Keep in mind, too, that the price of networking hardware is dropping as telecommunications carriers force hardware vendors to cut prices due to increased Internet traffic. Last fall saw the start of aggressive price cuts on router and switch products from Cisco Systems Inc., 3Com Corp., Bay Networks Inc. and Hewlett-Packard. The driver behind the decline in hardware expense is the rise of Internet volume. “Bandwidth needs will double in two years, and we are continually working to lower equipment costs with higher-density ASICs,” says Alex Mendez, vice president and general manager of the multiservice access business unit at Cisco in San Jose, Calif. (ASICs are application-specific integrated circuits used for products such as video machines, microwave ovens and security alarms.) “In 1998, the price per port of Fast Ethernet switches will be about $200,” Mendez says. The price in 1997, according to Dataquest, a San Jose, Calif.-based high-tech research company, was $530.
• Cutting-Edge Technology. Biting the bullet now to install fiber circuits can be a cost-effective solution in the long run; fiber carries more information than copper.
• Provider’s Growth Plans. Ask for a telecom provider’s technology road map. A CIO should partner with a company that will not only help scale the customer’s network but has plans to grow its own. Pacific Bell, for example, has a fiber-optic backbone designed to grow with its customers’ needs, according to Jim Pflaging, president of Pacific Bell Network Integration in Dublin, Calif. The company is also working harder to deploy ISDN and frame relay.
• Global Support. When doing business beyond the U.S. border, make sure the telecom provider has carriers in key countries and a strategy to offer service in developing countries.

Contract Negotiations

• Get competitive bids. It may seem obvious, but according to Boston-based Aberdeen Group, businesses last year left $34 billion on the table because they failed to do so. Competitive bids are crucial even when old contracts are up for renewal. Gartner’s McGee says the number of times a current carrier is willing to beat its original price will shock most CIOs. However, for some CIOs price isn’t everything. Some providers are making guarantees of service. Since data has become part of the telecom services game, carriers are scurrying to make a difference when it comes to service agreements. For example, MCI Communications Corp. plans to offer service guarantees for T3, promising to keep the lines available 99.9 percent of the time, according to Traver Kennedy, managing director of telecom research for Aberdeen Group. If the service goes down for more than one minute in a given month, MCI claims it will cut the bill in half.

  The jury’s still out when it comes to the issue of long- or short-term commitments with carriers. Long-term contracts always seem more cost-effective, but one reason for thinking twice about them is consolidation, a trend that will continue among service providers and telecom carriers. “If the carrier you are dealing with gets acquired by more than 25 percent, you should be able to invoke an escape clause,” says Eric Paulak, a research director at Gartner Group. The clause should state that within the first six months of the acquisition, the customer has the option to reevaluate or quit the contract without penalties.
• Include a reopener. If a long-term contract is in order, this allows for renegotiation in certain areas, like cost, as the price of communications continues to drop. For example, Providence, R.I.-based Textron Inc., with businesses in aircraft, automotive, industrial and finance, has an evergreen clause in its 10-year agreement with AT&T Solutions, which manages its multivendor telecom environment. The clause allows Textron to reevaluate its contract every three years. This way, explains Textron CIO William B. Gauld, Textron is covered in the event its needs or AT&T’s business strategies change. “I’m not sure in 10 years what our telecommunications requirements will be,” he adds. In addition, a reopener will allow for renegotiations when it comes to factors beyond a CIO’s control, such as changes in tax or telecom laws. Telecom taxes vary by state and differ for services such as voice connections or dedicated circuits between company facilities. Stay abreast of these changes and try to negotiate a discount in the event of a tax hike.
• Don’t sign a nondisclosure clause. Historically, carriers have had nondisclosures written into their contracts to hold customers to secrecy on pricing.

• Negotiate a level of control into the contract. For example, a service such as automatic dialing should be configurable by the customer.

  The bottom line for telecom procurement? Know your mission, know your needs, negotiate hard and always seek to make the best use of the carrier’s capabilities. Then you may find the road that leads where you want to go.

Cynthia Bournellis, a freelance writer based in San Jose, Calif., can be reached at cbournellis@cahners.com.