This is an in depth how-to guide for IT, finance, procurement, and legal, and relevant to telecom and IT contracts generally. Readers are encouraged to contact us for a full more official version of this guide.
We’ve found that many of our clients come to us with signed Volume Commitments, especially AT&T contracts with MARCs (Minimum Annual Revenue Commitments.) Unfortunately many firms fail to protect themselves from problems they didn’t see coming, yet in retrospect the problems were inevitable given how the vendors operate.
“This is not easy. MARC and similar-type contracts can be very challenging to negotiate and manage to everyone’s advantage” -Ken M. CIO
Without realizing it, firms can easily end up spending substantially more, be it 10%, 20% or more, in absolute dollars than they expected, or spend 10 to 20% or more per service on average than expected over the life of the contract. Either scenario wipes out most firms anticipated savings from a new contract. For those firms who do realize the problem, it is usually too late to do anything about it. Many never do.
You can learn below some ways to protect yourself from unpleasant and expensive surprises. We have included an extensive list of key items to look out for with volume commitment contracts and then for contracts in general. You may wish to literally check these off through the contract process, or create a checklist spreadsheet. First we’ll present some background. Feel free to skip ahead to the actionable items in Key MARC Checklist Items.
What are Volume Commitments?
Volume commitments state – ‘you commit to spend X dollars per year for Y years. If you don’t meet your commitment, you pay the difference. In return you can buy the services listed below at the rates listed below…’
One benefit of volume commitments is that you know what you have to spend and you simply need to spend that amount on whatever services you like. This gives some flexibility to add and drop services and you are locked in to the pricing you currently like.
Primary Problem:
Billing Errors
While this won’t come as news to many people, often the prices for services on your bills won’t be what you agreed to. It is worth considering how to shift the burden of the vendor’s failure on to them.
Attainment
What does surprise people is that many vendors will not accurately track your spending and let you know your attainment in a timely fashion. They cannot answer if your spend is above or below your committed amount. Remember, they have antiquated and disparate systems. This leads either to unpleasant and costly surprise expenses that could have been avoided, or to overspending to avoid penalties. A real lose / lose. The vendor wins because either you pay them more per service purchased, or you buy more services than you needed to. By analogy, through no fault of your own you become like a pro-sports team with a salary cap that is always spending above or below the cap and never hitting the target.
“I’ve run into the same issues. They have legacy Bell services under a large Club account, ABN for LD and newly transitioned MIS services (Legacy Bell to legacy ATT conversion) that has somehow been moved over to ABN. The commitment tracker functionality with business direct is a mess as it shows revenue commitments that are not nearly what they need to be.” Marc W. Consultant
One client was cheerfully informed by their vendor that the client was $800,000 below their commitment in their first year, but not to worry because obviously the vendor’s tracking of the client’s spend was wrong so they wouldn’t be asked for $800,000. The vendor did not tell the client early on they weren’t spending enough, nor did the vendor determine what the true attainment was. The client was left in the dark hoping the vendor would not present them with a bill for missing attainment for that year or future years.
Unfortunately if your MARC is $10,000, $100,000, or $1,000,000, and we’ve seen them all, what regularly happens is that after your contract is over or almost over AT&T will present a bill for missing the MARC. This also happens with other carriers, but we’re impressed by how consistent AT&T is so we’ll use them as an example.
Real life example A:
One of our clients, a building supply company with multiple locations had an agreement already in place to use AT&T for their long distance provider. They asked us to look for a MARC attainment shortfall notice they got well in to the last year of their contract.
AT&T claimed the firm was 33% below their commitment for MARC attainment. We knew the firm was spending plenty of money with AT&T. It took AT&T months to explain the origin of the shortfall.
It turned out AT&T not only wasn’t counting the firms MIS spending on data T1s, they refused to do so as MIS wasn’t in the contract. We thought the wording covered MIS, but AT&T didn’t. The client had no idea they’d signed a contract where there was no way they’d ever reach their MARC.
The firm and Berlin Pacific negotiated an agreement whereby the MARC attainment shortfall fees were waived. In return the firm signed on for additional years with AT&T and AT&T agreed to count all spending with AT&T.
Even after it was signed AT&T had problems properly processing the paperwork. Fortunately this time the firm had a signed agreement protecting them.
Real life example B:
Another client was informed of a shortfall well after the contract was over and the client had continued month to month (despite our recommendation to either re-negotiate pricing or leave.) The client called us urgently wondering what had happened. Together we determined that the problem was that the client had managed their spending to come in on target in their last year. However a large credit had been deducted from their spend.
The client had received a large credit at the beginning of their last year. AT&T had been billing for an expensive line to literally nowhere, making it relatively easy to get a credit. This credit for previous years’ errors was counted against the last year’s MARC creating a shortfall. In reality AT&T shouldn’t have been overcharging in the first place, and in the second place the discount was for overcharges on previous years no for the last year.
When faced with a large bill for a shortfall the client will be confused because AT&T had never said anything, and their total bills with AT&T were above the commitment. The client will then learn that AT&T was not counting some or all of the following:
• Taxes
• Regulatory Charges (and dodgy surcharges and pass throughs)
• POTS lines
• MIS – Internet Services
• PRIs and Voices T1s
• Bills which you would assume counted towards the MARC since they have AT&Ts name on them.
• Services which you would assume counted towards the MARC since that type of service is clearly listed on the contract.
While the last one is AT&T’s fault, if you signed the wrong contract AT&T will be ‘correct’ in not counting the other items.
After learning these surprising facts, the client then has to spend valuable time fighting with AT&T, or use Berlin Pacific to handle a problem which shouldn’t have occurred in the first place. In some cases the contract is such that the client is completely defenseless, even though they followed the spirit of the agreement, they have to pay in even more money.
Fortunately there are things you can do to protect yourself. Berlin Pacific can help negotiate these agreements, and we can even bring in lawyers who are experts at creating ironclad documents for you. Below is a list of key items we look for when negotiating an agreement.
Key MARC Checklist Items
You have no rights that aren’t in the contract.
Educate yourself. There are a number of things you should understand, do, and look out when you begin the process.
Attainment – Spell it out
Make sure AT&T makes clear what counts towards the MARC – which part of which bills. List the bills that count. AT&T doesn’t include many things – like POTs lines. Devil is in the details.
Be very clear on what is included on the Annual Volume Commitment. Their interpretation will be in their favor. Spell it out. Walk through it.
This is so critical it is worth spelling out further –
In addition to the contract language listing the services counting towards the commitment, have the carrier document what exactly which current or future bills or parts of bills you’re paying and services you’re buying today, or are about to buy, count towards your volume commitment.
“On Bill A – sections X, Y,Z count towards your commitment, sections U,V do not count but must be paid for. If there are any other sections you don’t have to pay them.’
The more specific the better.
You still need the part where the vendor lists in principle which services or costs count. Make sure you understand what those services are. Spelling that out also helps. Are they talking about pre or post discount costs. (Simply changing that wording make AT&T MARCs easy to fulfill.)
This allows you to now determine, from your monthly records, what your attainment is. Whenever you purchase new services follow this process.
Make sure to document what is being spent now and what portion will count to the commitment. Document exactly what portions of the bill count towards the volume commitment.
Make it very clear what is going on.
Attainment Reporting
This is also critical.
As one colleague said in a private forum:
“I don’t think it’s advisable to ask AT&T to run their own hen house. First, the eggs will be hatched before AT&T gets around to it…”
What kind of reporting on your attainment do you want?
How often?
What format?
Ask yourself what you want.
Tell the carrier we want X
Carriers says – ‘this is what we can do.’ Remember they have complex, antiquated, and disparate systems. AT&T has MIS, OneNet, ABN, EVPN, etc.
Try to figure out what you can live with.
Determine what how you will be protected if the vendor does not report your attainment in a timely manner.
“If you don’t send spreadsheet every month then you have to knock x off my volume commitment.”
“If you don’t tell us within X days of month’s end that our attainment that month was less than 1/12th of the annual commitment, then any shortfall that month won’t count.”
Get them to put it in writing.
Make it clear that you want to pay what you owe, but you don’t want to find out later you owe more.
In general most telecom firms must produce a bill within one year or risk not getting paid. This still may be too long as you may not get a bill for the last year till one year after the end of the last year.
Note that AT&T and other vendors often have clauses that credits to their customers for billing errors can only go back six months. Make sure this is reciprocal for commitment shortfalls. If they don’t notify you within six months you’re off the hook. This will instantly minimize the damage. However since you’re the customer and it is their job to tell you in a timely error free manner what you owe, and you’re always right being the customer, this isn’t really reciprocal. Give them perhaps the # of days you have to pay them to notify you of shortfalls. If you take longer to pay, they can take longer to tell you what you’ll owe.
Setting Expectations for Working Together
This section is not about MARCs per se, but it is about how you the details of how you work together, which is part and parcel of the volume commitment contract.
Make sure to get comfortable with the customer facing team. Are there people there who are committed to serving you? Are they knowledgeable, attentive, and timely? (If you’re unsure imagine how they’ll be after you buy. Do you feel comfortable?) Can you escalate easily? (Will they give you the numbers and e-mail addresses of senior management? Or do you only get the number of a call center in India? Or worse yet some other country?) You are the customer, and therefore ‘always right.’ Be sure you are happy.
What are the expectation for regular account review with the vendor? This should include reviewing current bills, any MACs since the last meeting, any production issues. This may be a weekly or monthly event. This helps keep everyone on the same page and establishes a relationship and trust. Account managers have a tendency to drift off after a deal is closed so it is also good to set expectations early.
What are the expectations for MAC tracking?
Similar concerns for attainment tracking also apply for SLAs. Track downtime yourself, and find a way to timestamp the start and end of it in your own trouble ticketing or NOC system. AT&T may fail to keep track of and document that two day outage for you.
How will the vendor handle the inevitable billing errors? What if you’re not satisfied? What if the bill is incomprehensible? Techniques for handling billing errors are a whole other can of worms, but it is worth bringing this up during the negotiations. In some cases dealing with errors is just a cost of doing business – but the vendor needs to realize they’re increasing the TCO.
Try to make sure credits from billing errors are not deducted from the spend counting towards attainment. It was their fault for the billing error in the first place.
Other Key MARC Items
Watch out for discount only contracts. Make sure underlying prices are agreed to and locked in for services you’re likely to buy.
Watch out for regulatory charges and surcharges. If you have to, go ahead and pay them, but first make sure they explain what they are, how much they’ll be, and if they’ll count. If they can’t explain them or don’t tell you about them in advance make it clear you don’t have to pay them.
Some people simply say that they won’t pay the UCC or USF and similar charges. It is a pass through not an obligation on the customer. Similarly we recommend getting an explanation of how they’re computed, especially if you’re buying MPLS or other data services.
Make sure you’re not responsible for charges or MARC penalties if AT&T didn’t install the service
If the site is down due to disaster or anything else, don’t pay for the service.
Agree to no more than 60% to 70% of anticipated spend. Keep flexibility. This makes it hard to miss the MARC. If it looks like you will miss the MARC and it is your fault, ask to extend the contract to make the committed volume up to them.
This may be a stretch, but making the time and volume parts more flexible may be better. E.g. Goal is to reach $3,000,000 in three years, but you have five to do it and the spending is cumulative. This still doesn’t let them off the hook for tracking the #s.
Make sure there are no penalties for putting items in dispute and not paying the disputed items. Be prepared to not pay for items in dispute. (This goes in to the whole field of expense management, but trust us documentation and follow up processes are key.) AT&T and other firms will waive penalties for late payment if you’re disputing something, but make sure it is in the agreement.
Construction fees to bring in new services or redundant paths, requests for cell towers, etc. are similarly negotiable. If the infrastructure can benefit other potential customers, e.g. cell towers, lines to serve your office can serve others floors or neighboring buildings, that’s reason to not be charged construction fees. Any costs, if you have to pay them, should count towards the MARC.
Are you part of another entity? What agreements do they have? Maybe you can use their pricing, or they can use theirs. If they’re part of another MARC you can often get your spending to count towards their MARC and to get their pricing or leverage lower costs. But again, make sure this is put in writing when make the move. (See Attainment – Spell it out above.)
‘Change in business’ clause. You must attempt to get a business downturn or some other language in a contract. This means you can cancel services if there is a flood, part of your business is regulated out of existence or just fails, the economy tanks, etc. In our opinion the isn’t much reason for telecoms to charge you big penalties for leavings. If they gave you equipment you should pay for it or give it back, and if they waived install fees it is not unreasonable for them to insist on getting that back. To give a story from one of our CIO colleagues:
I had a $10million MARC with AT&T, but the company I was with sold off a division and also ended up closing hundreds of offices due to a major shift in business strategy. We also had to change our network infrastructure architecture from a costly Frame-to-ATM network to a broadband with dial backup (among other things) to keep the company’s costs down and to remain profitable and in business. This type of clause was not in the initial contract, and both sides did eventually negotiate a fair compromise, but we absolutely had language added in at renewal time. Had we not, we would not have been as successful in getting out of trouble the next time it happened. We had a provision in the contract that allowed us to renegotiate the MARC without penalty due to extraneous business conditions. That may be tougher to do with smaller engagements (it was in AT&T’s best interests to keep the remaining $7 million in revenue coming in, and to not force us to move to another carrier), but it is worth pursuing that language for any company, provided they are keeping the carrier in the loop on what is happening with the business. As an example, I gave AT&T the heads up about potential changes to the business landscape well in advance, so I was not dropping the bomb on them after the MARC was missed. Another way to handle the above, which I implemented with Compaq/HP, was a true-up for each agreed-upon period (in my case, it was each year).
Outside assistance
It is ok to get the vendor to explain to you how the contract protects your interests, or to revise the contract to meet your requirements. Many of these vendors are perfectly able to insert correct language. In some cases you may want your lawyer to write portions. Having a lawyer review any final agreement is a good idea.
If these seem overly complex, we can help manage these negotiations as well as refer you to appropriate legal counsel who can verify if the contract you negotiated protects you.
This is what one CIO had to say on the importance of outside assistance:
I would stress the need for help in negotiating such large and complex contracts. You mention that it is a good idea to involve a lawyer, but I think it should be stronger than that when it comes to larger, more challenging contract that include MARCs. As a former customer that had entered into a number of these agreements, I learned some hard lessons early on that could have been avoided had I sought the help of legal counsel or of an external resource such as Berlin Pacific that had strong experience negotiating such language…I had to use every last creative negotiating skill I had to avoid disaster. Get help…it is worth the time and expense.
Prior Preparation for Contracts in General
Your sense of what is possible and what to look for will set the tone for your future – in life and when negotiating any contract or agreement.
In an ideal world, what would you like? It might even save a lot of time to have this documented so it can be handed out.
Shop around. Get a different perspective by looking at 2, 3, or 4 providers. Reading, comparing and understanding their agreements is also helpful. While many people a swayed by AT&T’s assertions that no one had their deep infrastructure and breadth of services this is no longer the case. (We also know many of these comparable providers, many of whom offer substantively superior service to the old firms, and we know what they’re really willing to charge.)
Everything is negotiable. While we know that is not always true, you should go into every negotiation believing it is true. It never hurts to ask.
As always, you, the customer, should understand that anything in an initial contract provided by a partner, AT&T included, is up for discussion and/or negotiation. All too often, people feel the need to accept the terms because they don’t understand them, are intimidated into not speaking up, or they have the feeling that AT&T or other vendors are big and experienced, know what they’re doing and have the customers’ best interests in mind at all times.
The contract should be a win-win. Get answers to your questions, make sure the language is acceptable and that you have no regrets.
In the end, all contract negotiations MUST be a win-win. If either side feels like they truly got one over on the other, or if either side feels like they gave up too much and feel uncomfortable, it is most likely not a good deal and will end up in dispute somewhere down the road. If either side has to debate the contract wording to deal with a dispute after the agreement is signed, there is a pretty good chance that relationship is not going to last very long. It just shouldn’t happen.
Anticipate the issues down the road. How does the contract address such things? Getting the contract in place is only the beginning.
Conclusion
Make it a partnership and not a competition. Have a strong relationship with your provider. This is incredibly important and helpful in large and complex MARC arrangements. You both want the same thing: to succeed.
Be prepared to get help. These contracts especially are NOT easy and can be very expensive. A lawyer can help, Berlin Pacific can help, prospective vendors can help (if you’re alert and ask the right questions and make the account rep get the right people involved from his organization) but don’t go it alone with these complex and large-value contracts.
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For more information on our approach to telecom savings e-mail us at sales@berlinpacific.com or call us at 212-247-2502
Tags: AT&T Attainment, AT&T Contracts, AT&T MARC Contracts, Minimum Annual Revenue Commitment, Volume Commitments, Volume Contracts