Negotiating a new wireline carrier contract can easily take as long as six months. Why so long? Because it benefits the carrier. Here’s a scenario to break this down:
You’re nearing the end of a 3-year agreement for wireline services with a telecommunications carrier. You’ve been working for several months to 'negotiate' to renew the agreement for another 3 years. Meanwhile, it feels like the carrier has been dragging their feet – until one day the carrier offers you a whopping $1M in savings per year.
Why has it taken so long? And what’s up with the offer? Should you accept it and move on?
If it feels like the carrier has been dragging their feet, they probably have – even though they’ve most likely known from the onset of negotiations they would offer up a $1M/per year savings in order to retain your business in this highly competitive marketplace. For every month of delay, they earn an extra $83,333 in revenue. That may not seem like much, but on a $5M annual spend, that represents 20% margin. The longer the carrier can hold onto that margin, the more profit they report to shareholders at the end of the year.
Should You Pursue Incremental Discounts in Wireline Carrier Contract Negotiations?
As for accepting the offer, it’s probably not a good idea for two reasons. First, the offer likely includes some requirement to transition to a new technology. For example, the carrier may offer incentives to move to Ethernet access to MPLS over existing T1s. However, the model prepared by the carrier may inflate the cost of the existing services (T1s) so that the cost of moving to Ethernet "looks" like a good deal. In this case, there may be other reasons to move to Ethernet, but it is still advantageous to pursue a better price point. Or, if the T1 access meets all requirements, do you really need to move? Or do you simply want a better cost for the T1 access?
Second, if you decide to pursue additional savings, what is the cost? For how long should you push? Time wasted in negotiations is savings wasted on your end, so it all comes down to math. On $1M in savings, the cost of negotiating one month is $83,333, two months is $167,667, etc. Offsetting this loss, an incremental 10% savings results in another $8,333 per month ($91,667 total). That’s an extra $300,000 in savings over a 36-month term. How long should you push for an incremental 10%? The formula is $300,000/$83,333 = 3.6 Months. So, as long as you can get an incremental 10% savings within 3 months, the long-term savings offsets the cost of the delay.
If you think there is room for 15% incremental savings, then the calculation is: 1,000,000 * 0.15 = $150,000 additional savings per year. That’s $450,000 in incremental savings over a 3-year agreement. Using the math in the previous paragraph, the breakeven for pushing an additional 15% savings is 5.4 months.
This discussion points out that while it may seem like a big win to finally get an offer to save $1M a year on $5M in spend, it may be worth pushing for incremental discounts as long as those negotiations are time-boxed by the value of the incremental save.
It also highlights the critical importance of performing analysis at the very beginning of the negotiation journey to establish targets for improvements in costs and cost-related business terms. NPI regularly helps clients save 30 to 50 percent on their wireline (and wireless) contract renewals – and it’s rooted in price benchmark analysis and a defined negotiation strategy.
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