The cost of an organization’s telecommunications services (voice, data and wireless), typically accounts for three to six percent of overhead, and can average more than two percent of total revenue*. In addition, telecommunications services spend is increasing. Industry forecasts predict that enterprise businesses’ spend on IT and telecom will increase 3.7 percent in 2012 over 2011**.
Industry Overview and Recent Trends
Alsbridge breaks the wire-line market into several groupings. First are the Full Service Providers, the perennial powerhouses (AT&T, Verizon and Sprint). Then there are the Business Wire-Line Providers (Level 3, CenturyLink, XO, TW Telecom, Windstream).
Full Service Providers
The telecom market has been volatile over the past several years, and Alsbridge sees no near-term end to that volatility. Sprint is primarily focused on growing its wireless services and investing CAPEX in 4G. They regard the wire-line network as the “cash cow” for continuing this investment. While they have a loyal customer base, they often lose share in competitive bids either due to non-competitive pricing or refusing to bid on traditional TDM services.
Business Wire-Line Providers
Qwest, now Century Link, is undergoing significant change and is now a more viable competitor in the IXC market with the increase in access network from the legacy CenturyTel network and the addition of the Savvis co-location assets.
Finally, on the Integrator front, we’re seeing companies such as HP, IBM, CSC and Dell Services beginning to de-couple transport services and enterprise clients contracting directly with the carriers while the Integrator continues to provide Network Management Services (NMS). This has yielded significant cost savings for those enterprise clients who have adopted this approach.
Just as the world is becoming increasingly global, the international telecom market is growing rapidly for enterprise customers. With the growing need for global control and fully meshed IP, this is no longer the best option, and buyers would ideally contract for these services with one provider.
Converged services have been studied as options, but deployment has been slow because:
1. Capital expenditure has been limited for the past couple of years by the economy and,
2. Pricing for the traditional TDM space continues to compress, making ROI in VOIP and SIP difficult to attain. That said, TDM voice has now begun to flatten out at 0.008 and savings are now obtained by implementing the new technologies.
Telecom pricing has shown significant decreases over the past four years, with the depth of the decline depending on the specific services used as evidenced in this chart.
Both Graph 1 and Graph 2 indicate two trends: a continuously declining average price (as indicated by the green line) and a continuously declining price point (as indicated by the blue line).
The price gaps between the lowest price point for a particular service and the average price for that same service are the result of:
Inefficiencies in the market; price point differentiation is the result of some buyers aggressively negotiating discounts while many buyers do not push for price concessions.
Price points are trending downward.
Alsbridge expects the market to continue to experience the following trends for the near-term:
Full Service Providers will continue to be difficult to negotiate with on pricing and contract Terms and Conditions as they flex their market power and continue to focus on trying to maintain their market share and revenue streams.
Layoffs will continue at Full Services companies, making retention of quality FTEs increasingly difficult.
Vendor consolidation will continue, while integration issues also plague the market.
The Business Wire-Line space will experience more activity, including increasing financial stability, driving better scale and service.
Network services pricing will continue to decline year-over-year.
The gap between the lowest price point for a particular service and the average price for that same service will widen.
Bandwidth consumption will continue to grow, with the expectation that price will not.
Enterprise IT investment will increase.
IT organizations will continue to struggle internally to develop fully meshed IP global strategies.
Wireless services will play an increasingly larger role in enterprise networks with new challenges
Network Cost Management Strategies
Recent trends in the market demand IT leaders remain constantly vigilant to ensure that they aren’t overpaying for network services.
Internal/User Management Strategies
Employ telephone expense management services - Telephone Expense Management (TEM) is an established methodology and toolsets that organizations use to effectively manage the telecom network.
Among the many benefits of TEM are:
A complete, up-to-date inventory of current products and services
EDI delivery of billing and usage data
Automated monthly audit and cost allocation
Significant time and cost savings in the analysis of network usage, management and spend
Identification of cost avoidance opportunities – invoice error discovery, missed invoices, etc.
Contract Management Strategies
Use vigilance with contract terms and structure— It’s essential to ensure your contract terms and structures are appropriate for the situation.
And then commit to monitoring those terms— Many IT leaders think the hard work is done once the deal is inked. Not so – the real hard work is in actively managing contracts with service providers.
Engage in annual rate reviews—Given market, price and vendor volatility, it’s vital that all contracts have an annual rate review clause. In our experience, providers often have what we call the “we’ll talk” language in their contracts: they’ll agree to essentially any provision as long as they can ignore the issue if they disagree with it after discussion.
Plan ahead for renegotiation and begin the process early—Contract review and negotiation always takes longer than anyone anticipates.
Use an advisor - As previously noted, telecommunications contracts typically account for three to six percent of overhead; they also have a significant impact on your business operations.
Press for savings on international services—International PTT access is difficult to benchmark and the carriers typically use the local PTT for access to their networks.
Provider Management Strategies
Engage in a multiple vendor RFP - It used to be that providers would respond to an implied competitive threat during a sole source negotiation; this is no longer the case. Use your advisor to benchmark your services against the market to establish a target savings range at the service element level and aggregate network level, then plan to issue an RFP to multiple providers.
But be cautious of channel partners—Many consulting organizations in the marketplace are actually channel partners with the providers.
Pursue an active secondary strategy—Select a segregable set of services, package those services together and find a different provider from your primary provider.
Consider other non-full service providers—As newer US-based providers emerge and the traditionally international providers press into the US, there are increasing options outside of the current Full Service Providers.
With network services pricing continuing to decline and utilization continuing to increase, IT leaders have to consider and implement sourcing and benchmarking strategies that will help them control telecom costs and ensure effective service.