Lisa Pierce, Vice President at Forrester Research, looks at how to winnow vendors in a highly volatile industry.

Compared to the previous year, 2005 network budgets grew by about 3.3 percent, but IT budgets grew much faster – by over seven percent. Many companies find that they must search for new ways to stretch scarce network and telecom dollars, and are searching for relief offered by telecom expense and inventory management (TEIM) suppliers.

Typically, strong telecommunications expense and inventory management (TEIM) practices can help customers wring an additional five percent or more out of their existing telecom budgets. For a US$2 million budget, that translates into a minimum savings of US$100,000 a year. Our enterprise clients also tell us that an additional five percent or more can be saved on an ongoing basis – depending on how deeply solid TEIM principles are integrated into internal business processes. TEIM vendors advertise far larger ranges of potential savings – up to 30 percent or more, but this greatly depends on an organization’s circumstances. A company that has already exercised its fiduciary duty will witness savings in the range we describe because it has already received a greater share of the benefits associated with centralized business process and control. In contrast, a company that has exercised less diligent process oversight can experience substantially greater savings – easily into the double digits.

One or more of the following conditions are often underlying causes that companies cite when seeking out the services of TEIM suppliers.

 Lack of adequate centralized control.
 Provider M&As or divestitures.
 Rapid organizational change.
 A significant number of site configuration changes, or types of changes.

Many companies lack sufficient internal checks on wireline and/or wireless billing accuracy. Often they don’t have an up-to-date repository of network-related assets. Many recent Forrester client inquiries have been from firms that are beginning to realize that their historic lack of proactive management of has significant cost. In particular, mobility is an oft-overlooked and potentially rich area for centralization. One manufacturing client began gathering its wireless usage data and realized that it was spending twice as much on mobile services as it had assumed. A global financial services client, with more than 10,000 users, is paying more than US$11 million a year for mobile services, but lacks the expertise and processes to manage mobile services and devices in-house.

Companies that employ decentralized processes to support remote access face similar challenges. About 30 percent of one mid-size professional services client’s key client-facing staff are full-time telecommuters, and all of them use hotel broadband services while on the road. But none of these network-related expenses are negotiated by the company: all are individually procured and vouchered. This makes it very difficult to determine supplier superiority/inferiority or to decide what constitutes reasonable charges and fees.

Standardization on common systems and platforms, including billing, can be a challenge for companies that are merging. We’ve spoken with a number who experienced billing irregularities when their legacy bills were switched over to the merged company’s going-forward billing system. Given the number of recent and pending mergers among tier one domestic and international telecommunications providers, many organizations could experience similar problems – and should prepare appropriate countermeasures.

Rapid organizational change includes company M&As and divestitures, rapid growth in the number of sites, or contraction. Companies periodically relocate offices or stores, even within a mall or a city, and can experience billing irregularities. Rapid organizational change also extends to a significant wave in hiring or downsizing – particularly if wireless services and devices are involved.

Internal company processes may not link telecom service order activity with internal financial systems as tightly as possible. This includes activities such as adding, dropping, or rearranging bandwidth, services, or features. This also extends to migrating to a new service or provider. All of these touch inventory reconciliation activities – which can be the greatest single source of TEIM savings.

THE MULTITUDINOUS SUPPLIER LANDSCAPE: KEY DIFFERENTIATORS

In the US alone there are more than a hundred vendors that claim to be suppliers of TEIM solutions. Firms dramatically range in size – many at the low-end, with one or two-dozen employees, while few have reached the size of the largest, with almost 500 employees. Four key sources of differentiation include standard and optional functions, mode of operation and supplier viability.

Organizations should identify which of the standard functions performed by TEIM suppliers are of greatest interest. One-time/historic telecom bill audits; ongoing bill verification; inventory cleanup and ongoing validation; bill dispute and credit resolution; bill payment; administration of cost allocation/chargeback schemes and codes; and bill analysis and rate optimization.

The following are areas many of the TEIM suppliers want to grow into. However, because these are not core competencies, we urge caution: generally speaking, allowing scope-creep is ill advised. In each of the areas listed, organizations have a far broader range of potential suppliers beyond the TEIM industry.

Network optimization typically focuses on legacy infrastructure concerns, such as access line consolidation. With the information supplied by audit or inventory activities, this is an activity that many organizations can and should perform in-house – especially given their significantly deeper knowledge of impending company projects and the organization’s values and priorities.

Telecom services RFP creation and issuance can include both legacy and emerging data and voice, fixed, and mobile services providers. Again, a large range of alternative sources of assistance exist, and thus merit consideration.

Provider selection and contract negotiation includes functions like negotiating price and stipulating contract terms and conditions. There is hardly any activity more important in the entire network acquisition process than this. While outside expertise or counsel can be sought, the actual selection and negotiation process should remain in the hands of customers. Outsourcing this function to any third party is generally unwise.

Many TEIM suppliers will urge prospects to sign up for orders, changes and disconnects – they are closely tied to inventory and bill verification. If TEIM suppliers are performing either of these functions on an ongoing basis, they will need to have this information. But customers also have broader issues to consider. These can include a requirement to conform to general company procurement standards and processes, or the use of particular carriers’ eServicing platforms (to monitor performance). These typically include eProcurement processes; these are often based on electronic data interchange (EDI), Web portals, or spreadsheets.

Network architecture often centers on new technologies, like VoIP or MPLS. Few of these suppliers have strong backgrounds in network technology design, engineering, or assessment. Those who supply this function generally do so in concert with outside partners. Organizations seeking this type of external assistance should look at other sources where these capabilities are core competencies.

Next, consider the supplier’s mode of operation that will be most beneficial to your firm in the long term. With a few exceptions, the vast majority of US-based suppliers that we studied in 2005 rely solely or heavily on the professional services model, and tend to focus on serving the Fortune 1000-2000. They rarely serve companies whose telecommunications services budgets are less than US$5-6 million a year. In the US, this includes the largest vendors. From a customer perspective, this approach often makes outsourcing ‘easy’ for the client (although there often can still be a significant amount of upfront pain gathering bills), but it also makes in-sourcing or changing providers difficult. Our work has shown that is not unusual for companies to switch vendors, thus organizations who rely on these types of TEIM suppliers should carefully consider how they will structure their agreement and processes in light of possible future sourcing decisions.

Currently there are few pure suppliers of a software-centric model. Moreover, two different models exist: software license/subscription versus application service provider (ASP) software-as-a-service. Without the assistance of personnel to collect and input billing data, it can be more painful to initially use a software-based model, but it also potentially supports a higher degree of integration with organizations’ existing or emerging back-office processes. These firms’ operating models, particularly the ASP approach, typically can support smaller size customers than professional services firms – even those with annual telecom spends as low as US$300-400,000. Typically, software-based solutions are the only ones that currently support in-cycle bill verification, which is very beneficial for customers who are interested in tighter cashflow management. Some of the professional services firms also allow customers to license their software, or to use it on an ASP basis. In such cases, the software should be evaluated separately from the suppliers’ other offers, and should be compared against the above types of software-centric solutions.

In the US, all of the TEIM-centric firms are privately held. Of the small group of leading wireless-centric and multi-modal US-based TEIM companies that we studied in 2005, the average size is 185 employees, but there is great variation. This is a comparatively volatile industry, especially among the professional services firms, because all of the largest suppliers of this type are the results of recent M&As, and several of our corporate clients have reported that key personnel in several of the largest TEIM firms are going elsewhere–typically to rival firms.

It’s possible for a company to be relatively large (with several hundred employees), but the number of employees supporting a particular function, especially one of the optional functions, can still be small (less than 10). Organizations should specify the types of functions that they are interested in, and request exact numbers of full-time employees (vs. contractors) who perform these functions for their enterprise organizations.
Although a particular supplier’s financial stability is highly relative, organizations can examine their rates of organic growth, in addition to several recent years’ worth of income statements and balance sheets.

TEIM VENDOR EVALUATION CRITERIA

Given the relatively high degree of variability in this industry, organizations should take the time to considerately craft RFIs and RFPs that specify important areas of supplier competency. Since a large number of suppliers exist, organizations should use the four key differentiators discussed above – standard and optional functions, mode of operation, and viability – to create a short list of prospective vendors. Given the sector’s customer attrition rates and volatility, initial contract terms should be short, and tied to a particular project without an extension, or to no more than a year’s length. In any case, agreements should always be explicitly confined to pre-specified activities.

First-order supplier evaluation criteria

In addition to the four key vendor differentiators, other first-order supplier evaluation criteria include offer scope, supplier coverage, competency, and knowledge transfer and process integration.

Offer scope should match the services you use and may include domestic and international, local and long distance voice and/or data services, audio and videoconferencing, ISP and remote-access services, calling cards, wireless voice, mobile data, and paging services, centrex, managed WAN, LAN, and security services, and telecommunications equipment – including routers, firewalls, and wireless devices. Suppliers should constantly expand their offer scope to keep pace with new telecom offers, such as Web conferencing and hosted VoIP. Some providers’ offer scope is very broad; others specialize. Some whitelabel the services of other firms. Thus, when crafting an RFP and negotiating with a TEIM supplier, make sure it specifies which functions are supplied entirely in-house and which are provided by third parties. The TEIM vendor should fully disclose the activities and identities of all third-party suppliers. Many
of the professional services firms, for instance, do not have wireless expertise in-house, but rely on wireless TEIM capabilities from specialists.

In terms of supplier coverage, specify which carriers and service providers you use for each local, WAN and wireless service; not all TEIM firms have strong working agreements in place with all US and international providers, especially smaller carriers (either regional firms, VNOs or tier one/two providers). Since most TEIM suppliers typically work in US currency, it’s also important to specify the type of currency each international provider’s bills are rendered in.

Prospective suppliers should be able to accommodate your company’s specific requirements concerning any of the functions you ask them to perform – whether it is meeting a particular level of SOX compliance or level of granularity in invoice processing. The supplier should be able to interface to specified electronic payment processes, financial systems and chargeback coding schemes. They should match your timeframes concerning invoice processing and bill payment. They should also comply with your reporting and querying requirements. The software should offer an intuitive, easy-to-use, web interface to view and query the invoice data and to check on the status of submitted claims to providers. Customers should assess the TEIM supplier’s level of process automation and controls (functions such as receipt of EDI feeds, associated process controls, and alarms triggered on exceptions). Enquire about which reports are standard and which are only available for an extra fee. Pay attention to such details and obtain all estimates in writing, particularly when employing professional services firms.

TEIM firms pride themselves in their ability to optimize the entire lifecycle of telecommunications acquisition: ordering, inventory, payment and reconciliation. Those on your shortlist should also excel at transferring critical knowledge concerning these processes to their clients. Our discussions with vendors and users have shown that it is not uncommon for TEIM clients to switch from one supplier to another or, over the longer term, to decide to in-source one or more of these processes. This is especially important to verify if you elect to use a professional services supplier who has developed an array of custom software. If you use this type of supplier, consider negotiating the price of in-sourcing the (professional services) TEIM supplier’s software upfront.

Second-order supplier evaluation criteria

In addition to the base evaluation criteria described previously, companies should assess suppliers on their ability to meet requirements concerning scalability, price, security, flexibility and track record.

Make sure that a prospective supplier’s systems, people, and processes are of sufficient scale to handle your requirements. Most of the large professional services firms focus on serving large customers – typically those whose minimum telecoms annual spend falls between $5 million and $6 million. Software-centric suppliers can more easily accommodate the needs of smaller companies. Whatever your size, the ideal supplier you select will have many clients whose telecom spending level and TEIM requirements are similar to yours.

Professional services firms’ fee-based models typically are tied to customer volumes, such as the number of bills processed or the level of a client’s telecom spend. They can also vary by the number of carriers or services involved. Software-centric firms sell by license fee, the price of which is often dependent on the customer’s number of employees, and thus, are often more affordable for companies with annual telecom spends of less than $5 million a year. Several firms have moved away from software licensing to an ASP (or software as-a-service) model, which can lower the barrier to entry even further. Professional services firms’ contingency fee-based activities often are tied to the amount of money they will save a client on a one-time or ongoing basis. These typically range from 15% to 50% of identified savings. Given such potential large windfalls, we generally discourage companies from using a contingency model. Certainly, organizations should only pay such fees after the supplier has secured the refunds from the telecommunications provider, never any earlier. Regardless of the structure of payment, consider suppliers that offer a return on investment (ROI) SLA for their work concerning telecom services savings.

TEIM suppliers should accommodate specific customer requirements on contract terms and conditions, including the availability of specific personnel.

Companies that outsource functions that affect the financial cycle, such as employing a third party to verify suppliers’ billing accuracy or to pay vendor bills, should consider the necessary documentation of appropriate controls in light of SOX Section 404 reporting requirements. The TEIM supplier should have multiple levels of controls in place to ensure the integrity and security of the billing data. Its management software should support configurable levels of access for different types of users to perform various transactions, such as checking usage, status, update contracts, pay, transfer credits, etc. In addition to controls on data access, an audit trail on changes made to data (who and when) should be in place.

Request information on suppliers’ current customer retention rates. Avoid using suppliers that simply hand you a list of corporate logos – expect them to provide at least three references that match your specified key needs and expectations (including those concerning knowledge transfer). Take the time to verify that their circumstances are akin to yours, and that they plan to continue using the supplier in question.

TEIM IS A PRECURSOR TO THE MAIN EVENT: NETWORK RE-ARCHITECTURE

Companies have been seeking ways to stretch network dollars for several years. Initially, they issued RFPs to seek out competitive prices and/or renegotiated prices with current providers. These were highly successful activities, especially because the bottom fell out of the telecom boom. Most companies that we work with have already done as much as possible using these tactics, particularly in relation to legacy domestic services.

More relief may be found by applying disciplined BPO life cycle principles to telecommunications assets and expenses – whether done in-house or in concert with solutions provided by third parties. Despite the significant and permanent cost improvements these techniques can provide, organizations will find that they again will reach a new cost floor at some point. All this, however, is mere dawdling compared with the upcoming main event: network re-architecture.

Companies have been avoiding this work in part because it requires a great deal of planning, analysis, and attention to detail – at a time when existing resources are stretched to the breaking point. And new services that promise to lower costs and improve productivity, such as VoIP and MPLS, will need to be incorporated. When these services are sufficiently mature, enterprises will begin re-architecting their networks end-to-end, ultimately at great scale.

Given the volatility in the carrier landscape caused by many tier one M&As, many customers will wait to re-architect until the merger dust fully settles. When they do re-architect, they should verify that excellent business processes are in place to ensure new services are ordered and installed as specified, and that they perform as expected. They’ll also need the same processes in place to ensure that legacy lines and services are subsequently disconnected. Disciplined TEIM activities can help make all of this possible.