Updated: Feb 23
Buying telecom is quite different from purchasing other technology. Although it relies on networking equipment, telecom is priced more like an IT service, and is typically billed monthly. In the U.S., the industry was a two-horse race between AT&T and Verizon, and then T-Mobile merged with Sprint last February to create a formidable new contender. It is not an exaggeration to say that these suppliers are almost solely – and ferociously -- focused on winning market share from one another.
While it is difficult to benchmark or achieve transparency with these vendors, telecom is arguably the easiest place for a client to achieve savings. To look at how, let’s first look at the wireless segment, which drives between 40 to 50% of telecom supplier revenue.
Unlike with software and hardware vendors, switching wireless suppliers is relatively easy, plus you can have more than one vendor in your environment. This situation means the buyer enjoys more leverage than the suppliers, who are constantly battling for more of your business. In fact, these suppliers are often willing to pay off your current commitment to get you to switch to their offering. It bears mentioning that in wireless deals, you can amend your contract at any time, and there’s no hard renewal date, like with hardware and software agreements. Both points provide buyers with leverage.
We worked on a recent wireless case which involved a client who got a $3.4M proposal from AT&T. The client decided to bid out the deal and use competition to drive down costs. As illustrated in the following chart, T-Mobile responded with a $1.36M wireless proposal – a whopping 60% below AT&Ts.
Then, T-Mobile sweetened the deal: if the client would commit to moving a minimum number of users to its service, the vendor would tack on an additional 17% discount, reducing the proposal to $1.13M. Knowing that vendor negotiations can go several rounds, ClearEdge advised the client to convey to T-Mobile that they would probably opt to stay with AT&T. T-Mobile then increased the discount to 22%, which reduced the cost to $1.06M – to which the client agreed. These negotiations were achieved without a formal process – just the competitive situation showed that this vendor was willing and able to provide deep discounts to win the business.
The telecom spend (not just the wireless segment) is ripe with other savings opportunities. For example, we know that a staggering 80% of telecom bills contain errors, and most of them go unchecked. A recent client survey showed that savings of 10-20% can be achieved by simply by forecasting usage and renegotiating the contract.
Vendors routinely get customers to over-commit, and because this practice is so common, customers actually have the ability to audit the suppliers. Given how complicated and inflated telecom invoices are, an entire new industry sprung up to address this problem: Telecom Expense Management (TEM), companies that examine these bills for mistakes and overcharges. So confident are these service providers that they will save you money, many TEMs guarantee results and charge customers a percentage of savings achieved.
Like their wireless brethren, sales reps in non-wireless telecom are financially motivated by winning market share, and care little about the size of the spend or even client needs. As the following chart shows, they are commissioned on (a) grabbing customers from the competition, and (b) selling new and upgraded products.
This example shows how a customer’s costs actually decreased when they upgraded and stuck with a vendor: they did the two things that would most compensate the sales rep. This is not uncommon.
A good example of technology upgrades is the transition from what suppliers call plain old telephone systems (POTS) to something called voice over IP (VOIP). The FCC is gradually phasing out POTS lines, which essentially calls for the movement from analog to digital technology. This massive shift has spawned a great number of competitors who want to help customers make this move, which we’ve highlighted in the following chart.
Like the huge savings available to wireless customers that introduce competition in their supplier engagements, so, too, can POTS to VOIP clients. The next chart illustrates what savings were achieved when the client bid out a proposal from local exchange carrier Granite: AT&T offered a solution that cost 63% less, which the client accepted.
To learn more about how to build leverage in this fiercely competitive market segment, download our blog titled “Telecom Bills: Landmines and How to Avoid Them”, or contact your ClearEdge representative.
Roisin Henry is an Analyst at ClearEdge Partners.