Beware binding telco contracts

By David Rohde
Network World, 03/08/99

Are you thinking about yanking your voice traffic off the public telephone network and putting it on your own data network? Do you want to replace your frame relay service with an IP virtual private network (VPN)? Are you preparing to use the 'Net for faxing?

Better dust off your telecom contract and check the fine print first. If you move voice and legacy data traffic to new IP-based transport schemes before your current contract expires, you could set yourself up for a hefty financial penalty.

Why? Because most telecom contracts contain minimum annual commitments (MAC) - obligations by the user to spend a certain dollar amount with the carrier for each year of a term contract. And if you move traffic to a less-expensive - or free - option before the contract ends, you could fall short of your MAC even if your traffic volume stays the same.

That's why contract consultants are now urging users to demand what are known as technology-displacement clauses in carrier contracts - even if users are only beginning to consider merging their voice and data networks.

These contract additions, also called technology-migration clauses, state that the MAC will be reduced or disregarded if a major technology shift causes a money-saving WAN service to become a viable option. Without such a clause, experts say, you could be putting yourself out of the convergence market for the entire term of your next contract.

You can risk financial penalties even if you don't make a substantial technology shift. For example, many organizations' internal 800-number applications are being replaced by simple e-mail, says Dick Kuehn, president of RAK Associates, a Cleveland firm specializing in telecom contract negotiations. In one client's case, 800-number volumes recently fell off for this reason. "The carrier came in and said, 'You missed your commitments.' Now we are having a major fight over it," he says.

Technology-displacement clauses have been "absolutely key" in Yale University's carrier deals, says John Meickle, Yale's director of telecom planning and technology.

Yale's telecom unit provides myriad voice and data services - including long-distance telephony - to the campus community by buying bulk contracts from carriers. "But now our user community substitutes e-mail for long distance," Meickle says. Some students and faculty members have also used voice over IP internationally, as well as prepaid calling cards.

"We can't internally lower our rates fast enough," Meickle notes. As a result, in one three-year carrier contract, Meickle negotiated a 15%-per-year drop in the overall MAC. In another contract, "we have [service] substitution clauses all throughout it," he adds.

Devil is in the details

But don't be fooled, consultants warn. Some carriers will present technology-migration contract programs that don't necessarily protect against MAC penalties.

For example, AT&T offers two programs - the Data Services Volume Pricing Plan and the OneNet Basic Telephony Bundle - that offer some flexibility for switching among private-line, frame relay and other services during the course of a contract.

"But none of AT&T's standard programs offer technology-migration clauses with teeth," says Hank Levine, a partner in the Washington, D.C. law firm of Levine, Blaszak, Block and Boothby. A problem arises because the MAC in dollar terms remains the same in both these programs, meaning you'll have to make up per-minute or per-byte cost savings with new traffic to avoid a penalty.

Debbie Shashaty, lead communications consultant for Reynolds Metals in Richmond, Va., says the wording of a technology-displacement clause should be as broad as possible. Otherwise you risk missing the point of the clause - to anticipate the unanticipated.

Reynolds' contract with AT&T gives Reynolds broad discretion to move among services - currently frame relay and potentially ATM and VPNs - so long as the traffic stays with AT&T. Not only that, it's a combined voice/data contract with an overall corporate MAC, Shashaty says. If Reynolds had separate voice and data contracts, she says AT&T could claim a shortfall on the voice traffic if it was moved to the data network, and therefore invoke a penalty.

Yale's Meickle negotiated wording stating: "In the event of an up-grade reflecting a new, more cost-effective service, the customer's commitment shall be lowered commensurately."

Carriers will resist this kind of wording unless you threaten to take the business elsewhere, Meickle says.

"I was actually the one who suggested this wording," he says. "At first they said 'no,' but then they said 'yes.'"

RAK Associates' Kuehn suggests another approach: Ask the carriers for a MAC in minutes rather than dollars. That way, at least on the voice side, a customer can commit to the same traffic volume for progressively lower fees. "Sprint will do minutes rather than dollars," Kuehn says. "The others you have to fight."

MCI WorldCom officials say they avoid minute deals and, so far, offer dollar-based MAC-reduction options sparingly. "The consultants are using it to drive negotiations with our customers," complains Ron McMurtrie, vice president of product marketing for MCI WorldCom. But on a caseby-case basis, technologydisplacement deals with MAC reductions are available, McMurtrie says.

AT&T likewise will negotiate firm technology-displacement deals on a custom basis. For a highly sought-after customer, "it's not in our interest not to work something out," says Steve Sobolevitch, AT&T's director of business-markets pricing.

Sprint offers no standard mid-contract MAC-alternation clauses but will work with users on a case-by-case basis, a spokesman says. Under its Sprint Technology Evolution Plan, the carrier offers a set of equipment leasing and other incentives for customers making WAN migrations.

Another gambit

As an alternative to technology-displacement clauses, some consultants suggest that users ask for volume commitments - particularly for individual services - to apply over the life of a contract rather than each year or month. That way, Kuehn notes, growing traffic volumes can pay off your commitment to that service early - much like paying off a mortgage early - leaving you free to implement a new WAN technology.

But whatever you do, consultants urge users not to accept so-called "will talk" or "agree to agree" clauses to deal with MAC shortfalls. These clauses, often pushed by carriers, simply mean that the two parties will sit down in case of a mid-contract volume problem and work something out.

That solution, Levine says, almost always involves stretching the contract out to an even longer contract commitment, further delaying potential migrations.

Or as Yale's Meickle put it: "If they're pushing the contract, it's going to be in their favor. You need to work so that it's equitable to both sides, or in your favor."