Telecommunications Procurement Update — Winter 2019 (Wireline Services)
This Update is intended for enterprise IT, telecom, procurement staffs, and in-house counsel responsible for telecommunications management and procurements, focusing on strategies to maximize savings and optimize services to meet projected enterprise requirements.
XO Communications is now part of Verizon, CenturyLink has acquired Level 3, and, among the cable operators, Charter has acquired Time Warner Cable. The environment is more favorable for multinationals that can look to Orange, BT, Tata, or Telefonica to compete for their international and rest-of-world services. Whether DoJ and the FCC, respectively, approve the T-Mobile and Sprint merger will remain an open question for several months.
Unlike the markets for cars and publicly traded stocks, there are no publicly available resources on pricing trends or terms and conditions for telecommunications service agreements. The rack rates in carrier service guides do not reflect the best available pricing for any given expenditure level or mix of services. Timely, well-planned procurements with the assistance of experienced consultants remain the baseline for a successful procurement. Additional background is available on our blog: Telecommunications Services Agreements—The Underlying Business Deal.
Importance of RFPs
Requests for proposals are the starting point for negotiations. In addition to the essential description of a customer’s current network, desired services, and projected growth in usage, bandwidth and locations, the enterprise’s proposed terms and conditions (both business and legal) should be set out in the RFP. Even if the carrier declines to accept certain provisions, compromise positions can be negotiated. If preferred provisions or customer interests are not set out in the RFP, negotiations are more challenging.
Transitioning to New Services
Wireline carriers deploy new services to achieve efficiencies, remain competitive, and deliver innovative offerings and savings to customers. Many enterprises have just concluded or are working through the transition to IP voice services, principally to SIP trunking. A newer offering is SD-WAN. It enables network flexibility, redundancy, and cost savings as compared to exclusive reliance on MPLS for corporate data communications. Enterprises should assess the value (or accept the reality) of these services and structure their RFPs accordingly.
Limits of RFPs
In terms of enterprise telecommunications priorities, network security is now on equal footing with service reliability and availability. The relative efficacy of carriers’ internal network security practices cannot reasonably be reduced to comparisons of responses to RFP questions. A qualitative assessment, possibly based on independent third-party investigations or reviews, is required. RFPs may be structured to compare the elements and pricing of carriers’ network cybersecurity offerings, but in 2019 the relative efficacy of competing carriers’ offerings likely requires independent assessments, as well.
Assuming the incumbent carrier submits the most compelling bid, don’t look to negotiate a new master agreement. Focus on minimum commitment levels, lowest rates as opposed to incentive pricing schemes, migration strategies to newer, preferred services, customer support, mid-term benchmarking, service levels, and the transition period at contract expiration. The more recent carrier master agreement templates are progressively more one-sided. If the incumbent carrier insists on a new master agreement (or a more onerous set of general online terms and conditions), core terms and conditions in the RFP and previously negotiated provisions provide the customer’s baseline for negotiations.
If migrating to a successor carrier, be prepared for the successor’s master services agreement with a compilation of preferred clauses (which should track those included in the RFP) and propose a scope of work for the network transition, striving to limit the period during which services from the incumbent and successor carriers overlap while recognizing the carriers are loathe to negotiate a detailed transition plan as part of contract negotiations. (This intransigence makes little sense as the successful bidder typically acquires a detailed picture of a company’s existing network and locations in the customer’s RFP that, in turn, is central to the service provider’s RFP responses.)
Bandwidth requirements have a persistent, upward trajectory. The questions are how fast and to what extent. For local or regional requirements (such as connectivity to disaster recovery sites or among large, geographically concentrated facilities), an optimum solution may be a dark fiber lease or indefeasible right of use. Additional background on dark fiber leases and IRUs is available on our blog: Enterprise Customers and Dark Fiber: An Important Connection, Part 2.
The virtue of dark fiber is that over time the enterprise can upgrade the electronics to derive more bandwidth from a given quantity of dark fibers. The challenges are that dark fiber is not ubiquitously available and the major wireline carriers and cable operators do not routinely offer or even negotiate dark fiber arrangements. Even in markets where dark fiber is available, new construction likely will be required to establish connectivity between or among the enterprise’s locations.
Telecommunications Surcharges and State Taxes
The cost impact of telecommunications regulatory surcharges and taxes on enterprise services varies significantly based on the services being provided and is underappreciated by many enterprise customers.
The aggregate surcharge and tax burden for an interstate private line or a special access circuit can exceed 30% of the monthly charge. Conversely, no surcharges or taxes are imposed on the charges for high-speed Internet access service, but up to 65.8% of the revenues from VoIP (SIP) services are “USF-assessable.”
This disparity is driven by three considerations. First, state and local jurisdictions need revenue and have targeted telecommunications services (wireline and wireless) as a prime revenue source. Second, the Internet Tax Freedom Act prohibits the imposition of state taxes on charges for Internet access services. Third, the FCC’s Universal Service Fund rules require USF contributions from service provider’s revenues from interstate and international telecommunications services and VoIP services but excludes revenues from information services such as Internet access service. The FCC allows services providers to recover their USF contributions via pass-throughs to customers.
The USF contribution factor (% of assessable revenues) is adjusted quarterly. For the first quarter of 2019, the contribution factor is 20%. Local state and sales taxes range from 3.5% to 6.0% of telecommunications services and VoIP (SIP) revenues. The major carriers also recover property taxes, gross receipts taxes, and costs of regulatory compliance, as set out in their service guides. Adding insult to injury, these tax and cost recovery charges are added to the carrier’s USF-assessable revenues.