Dealing with the paradox of rate reviews and contract extensions

If you got a memo today from a senior executive in your company ordering you to get rate reductions from your principal carrier right now -- and never mind when your contract actually terminates -- could you do it?

An equally interesting question is: What would you have to give up to get it?

On the surface, many people would say that it's becoming more difficult to achieve mid-contract rate reductions. That's because carriers are becoming markedly stingier about rate review clauses. In many cases they're refusing to offer rate reviews in new contracts. In other cases they're offering rate reviews, but not annually.

That's leading to silly proposals such as offering an 18-month rate review on a 2-year contract -- silly because if you're negotiating a rate review rather than a new contract six months out from termination, something's wrong.

But looked at another way, instant rate reductions are very doable right now. That's because carriers have ramped up their activity in pre-emptive contract extensions and new term agreements with customers who are well short of termination.

Such activity appears to "solve" an additional problem that's been plaguing users in 2009 -- the recession. But that's led many people and organizations into a survival mode of thinking.

Think about it: rate reviews and pre-emptive contract extensions may both appear to be dealing with straight dollars, but the logic of the ongoing relationship is reversed in each. In a well-structured rate review, rate reductions occur because the carrier is fearful of having your commitment to it reduced. In a pre-emptive new contract term driven by the carrier, the carrier very often gets your commitment increased -- via length of term, percentage of spend obligated to the carrier in a MAC, even pseudo-exclusivity clauses that effectively prevent you from seeking competition.

One of the main points we make with corporate users is that there is a continuum of contracting tools that are available at any given time. For example, if there's a trend to scale back rate reviews, there may also be a trend toward term (rather than annual) dollar commitments. Regularly retiring a term commitment more than a year early has much the same (if not better) impact than rate reviews, because it knocks out the final year's obligation and you are regularly free to "discover" the market via competitive bids.

But in today's environment, carriers love to mask this exploration of counter-trends with what my colleague Ben Fox calls "new temptations" such as slightly lower pricing and credits that end the search for competitive contract terms and market-based rates.

These themes are explored in a major piece that Ben has authored for our friends at VoiceCon and NoJitter.com called There Is Only One Sure Way To Get The Lowest Possible Telecom Prices. Ben explains how you can change the toolbox that your carrier is using if you 1) don't get stuck on a single trend such as the decline of rate reviews, and 2) know how to introduce competition even under the pressure of today's economy.

All of us at TC2 have experienced how the carriers have two entirely different sides -- Ben calls them the Dr. Jekyll and Mr. Hyde personalities latent in each carrier -- when you change the discussion in this way. Ben also discusses the internal management challenge of positioning your organization to face Dr. Jekyll when your executives and peers may be unwittingly setting you up for a date with Mr. Hyde.

Simultaneously dealing with the external and internal pressures on your job is a major theme of this blog, and Ben's article deals in depth with the very situation that many users are facing right now. Check out the piece and let me know any of your thoughts as well.