Few people would sign a contract with their cable company that said “This
contract runs for two years. The initial price for basic service is
$44.95, but we are free to raise the price when we want to, and you are
still bound for two years.” If you saw this clause, you would ask
yourself, “Why would anyone ever sign a contract like that?” Yet it is
surprising how many otherwise sophisticated businesspeople will sign a
business telecom agreement containing what amounts to an identical clause.
This point was brought home again recently when a channel partner/telecom
agent asked me to look at a contract that one of his small/medium business
clients had signed. It was a one page “Dedicated Voice LD Order Form and
Term Plan” that (so the customer thought) provided fixed monthly recurring
charges ("MRCs") on four T1s and fixed per minute charges for various
flavors of inbound and outbound LD calls.
Unfortunately for the small/medium sized business ("SMB") customer, the
plan contained this sentence:
“All services provided to Customer by [Carrier whose name has been changed
to protect the not-so-innocent] are governed by the terms of a Service
Agreement, which may be found at www.[carrier].com/terms and which are
incorporated into this Agreement by reference.”
Naturally, the SMB never read the website Service Agreement. Months into
the arrangement, it received notice from the carrier that its new LD rates
would be far higher than the initial rates. When the telecom
agent/channel partner came to me, I immediately went to the carrier
website and found this paragraph in the Service Agreement:
may change this Agreement at any time.
Carrier will notify Customer of any material change in this Agreement,
in Customer’s services or of an increase in rates or fees prior to the
billing period in which the changes would go into effect, except for
international rates, which may be changed on one (1) day notice.
Notification of any such change may be in the form of a bill insert or
by a message within your invoice, by postcard or letter, by Carrier’s
calling and speaking to Customer or leaving a message for Customer, by
postings on our website at www.[carrier].com/terms, or by email."
The carrier, like the cable provider in my initial example, had
gotten the SMB customer to sign up to a long term contract without locking
in a price. It’s a great business model if you can get customers to agree
to it. This happens most often because the customer doesn’t read
the entire contract. The key word is “entire.”
While the example that prompted this article is egregious, it is hardly
unique. Nor is the practice limited to resellers or SMB customers. The
old AT&T, for example, was notorious for signing agreements that gave
large business customers a fixed percentage off the published rack rate.
Then AT&T consistently raised the rack rate. De-tariffing didn’t help –
instead of offering a percentage off the tariffed rate, AT&T simply
offered a percentage off the price on its website, which was still subject
to change on the carrier’s whim. There is an analogous issue for channel
partners – what to do if they sign up customers for a carrier based on a
specific level of rates and service quality, but the carrier’s rates or
service quality change, causing customer dissatisfaction and loss of
What’s a customer or telecom agent/channel partner to do? There are
several options. Those available in a particular case depend on a
customer’s bargaining power, which naturally is a function of many issues,
among them the size of the customer’s anticipated spend, the services
involved, and the role of the telecom agent. The customer’s best option
is to sign a fixed rate, fixed term contract with a price comparison
clause. This protects the customer from unexpected price increases, and
provides potential upside in the form of price decreases when
product/service prices are falling (which has been the situation for most
telecom prices over the last decade). This type of clause is common in
carrier contracts with large enterprises, but rarely available to SMB
customers with less spend and less negotiating leverage. Such clauses are
unheard of in agent contracts.
The second best choice is a fixed rate, fixed term contract with no
website “gotchas.” There are various ways to achieve this. The easiest
is to include the entire website terms of service (including prices) as of
the contract’s effective date as an appendix to the short master
agreement. This by itself does not resolve the problem; the master
agreement must also “freeze” the website TOS as of the effective date and
explicitly override any TOS provision allowing the carrier to make
unilateral price changes. Few service providers will agree to this
restriction unless the potential revenue is material in absolute or
relative terms (i.e., because it will enable the provider to become cash
flow positive for that quarter).
A more realistic option (less effective and with risks of its own)
sometimes available to smaller customers is an “out” clause for material
changes in the contract terms. This type of clause (1) identifies
specific parameters, such as uptime or electricity cost on data center
collocation or price or call quality on certain long distance ("LD")
routes, as being crucial to the customer in deciding to enter into the
contract, and (2) provides that a material change in one or more of the
factors opens a window for the customer to decide to opt out of the
contract without any early termination penalty.
The devil is in the details in these contracts. For example, a clause
creating a window for a customer to cancel T1s and move their associated
LD minutes to another carrier is an excellent idea, but if it is limited
to 5 or 10 days it is generally pointless, since that is rarely going to
be adequate time to move the circuits. Rather than lose service for the
30 days or more that it may take to get T1s installed by another carrier,
an SMB customer will swallow the price increase.
A similar problem arises for agents, particularly those in the
residential and SMB international LD markets. Such agents may create
sophisticated marketing campaigns aimed at niche ethnic or national
expatriate populations. The appeal of the service and the agent’s ability
to build and maintain a customer base depend largely on call quality and
price to a handful of international destinations. If for some reason the
carrier’s quality of service declines, or it raises its prices to those
destinations, the agent is in a double bind. First, its commissionable
base with the carrier declines drastically through no fault of its own.
Second, under almost every carrier’s standard contract, the agent is
prohibited from contacting customers to move them to a carrier providing
better price or service.
Here, the issue is customer ownership (and the role of the agent) rather
than the ability of the customer to move. But the solution is similar –
specify in the agent-carrier contract the price and quality parameters on
which the relationship is based and allow an agent to contact and move
customers without penalty if the key parameters change materially. Of
course, service providers hate such clauses. But as more service
providers become desperate for revenue during this period of economic
recession, I expect to see more customers and agents asking for, and
getting, such “out” clauses in their new contracts.
Readers should glean several takeaways from this article. First, if
you are entering into a contract without using a lawyer, at least read the
entire contract -- including the parts on the website. Second, assume
until proven otherwise that buried somewhere in the website is a clause
allowing the service provider to raise your rates essentially at will,
especially if the provider is reselling the service(s) you are buying.
Third, ask yourself how the contract really benefits you. Why would you
sign a long term contract that has no price stability?
Finally, realize that cash and monthly recurring revenue are kings
in this recessionary period. The negotiating leverage of good customers
and effective channel partners is magnified. Take advantage of this
temporary increase in bargaining power by looking at your contracts now.
If they are on month-to-month or within a year of expiration and you
believe your business needs will be similar or even growing over the next
couple of years, then you should be looking to renegotiate now. This
advice applies to both end user customers and telecom agents.