This is the first entry of a two-part series on the services agreements that major enterprises enter into with telecommunications carriers to meet company-wide telecommunications requirements, providing connectivity between enterprise locations, and to cloud resources, suppliers and customers, public voice networks, and the World Wide Web. These agreements may encompass domestic services, services between the United States and other countries (international services), and services between foreign countries (foreign services), or some combination of these.

Enterprises typically acquire wireless services and wireline services under separate procurements and agreements. This series focuses on agreements for wireline voice and data services including Internet access services (“telecom services”).[1] This entry provides an overview of the procurement process and the business deal. The second entry highlights the agreement structure, an approach for counsel to assess business and legal terms, and conditions commonly found in telecom service agreements.

The Basics of Enterprise Telecom Services Procurements

A telecom services procurement is typically initiated to migrate to new or lower cost services, a significant change in telecommunications requirements (due to a major acquisition or geographic expansion), more favorable pricing, the desire to assess the capabilities of other carriers, or a combination of these. The agreements have a 3-5 year term, typically with one or more customer renewal options.

Telecom carriers are selected based on reliability, geographic reach of their networks, diversity of services, and price. Many enterprises rely on a primary carrier, sometimes with another carrier providing redundant service between major locations or to different regions, particularly for international and foreign services. This is true whether the enterprise is a technology firm, a major retailer (online or brick and mortar), a utility holding company, or is engaged in finance, payment processing, logistics, manufacturing, transportation, or energy production or distribution.

A threshold procurement question is whether the customer will rely solely on in-house procurement staff or retain telecommunications procurement consultants to execute the procurement. Engaging telecom procurement consultants may be the prudent approach for many enterprises, as these consultants likely have a better sense of market pricing and carriers’ current offerings and business objectives. Under either approach, a well-conceived RFP demonstrates there is a risk to the incumbent service provider(s) of losing the business and an opportunity for other carriers to win new business.

The in-house procurement team or consultants review current agreements and bills to determine usage, locations, and circuit mix for developing the demand set for the enterprise’s RFP. This is true whether the customer’s current network arrangement of services will be maintained or modified, including utilizing different services. A timely, thorough RFP facilitates an apple-to-apples comparison of responses from interested carriers.

Customer’s counsel should review the RFP, particularly if prepared by a consultant. It is preferable that legal terms and conditions consistent with the Company’s interests and practices be included in the RFP. Non-disclosure agreements (NDAs) protecting a customer’s data conveyed to a consultant and, subsequently, to the carriers receiving the RFP are appropriate.

The Business Deal  

Telecommunications voice and data services, including Internet access services, are standard offerings that are available from multiple carriers. Services generally meet customer expectations. The principal variables are price, geographic reach of the carrier’s network, customer perceptions, and carrier responsiveness to shifting customer requirements.

In addition to Telecom Services, carriers offer managed services that may also be provided by  third parties. Managed services include application routing (SD-WAN), monitoring and managing customer routers, and security, such as VPNs and firewalls. Managed services may be acquired with telecom services[2]. Conferencing services, such as Microsoft Teams and Zoom, are applications enabled by Internet access services and other data services.

Carriers have developed Service Level Agreements (SLAs) for their telecom services. SLAs are routinely elicited for services included in RFPs. We discuss SLAs at greater length in Part 2 of this series.

Apart from a handful of tariffed services, rates for Telecom Services are market-based, determined principally by the efficacy of the procurement process, the customer’s service mix and projected expenditures, and the extent of perceived competition. Many agreements provide for competitive pricing reviews that occur at defined intervals during the term of the agreement. Customers often retain consultants for these pricing reviews.

The efficacy of pricing reviews is one reason telecom services agreements may remain in effect for 10 years, through multiple amendments adding services and changing rates. Another is the challenges of transitioning services from one carrier to another, particularly for enterprises having hundreds of locations throughout the United States or in multiple countries.

There are two categories of rates and charges in Telecom Services Agreements: 1) one-time, non-recurring charges, principally service provisioning charges, and 2) recurring monthly rates, either fixed monthly or variable, usage-based (voice services) rates. Customers typically prefer that charges and rates be expressed in fixed dollar amounts as opposed to percentage discounts of rates in providers’ pricing schedules. Service providers regularly require minimum customer expenditure commitments. Customers prefer aggregate expenditure commitments that are either annual or for the term of the agreement, as opposed to service-specific commitments.

Fixed rate pricing and minimum commitments will be discussed further in Part 2 of this series.

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[1] In terms of regulation, Internet access services are classified as “information services.” In the United States and many developed countries, information services are subject to less regulation than “telecommunications services.”  Another widely used data service, known as MPLS, is sometimes treated as information services. However, these services are universally included in telecom services procurements. For enterprise customers, a major distinction between information services and telecommunications services is the extent to which the respective service types are taxed and subject to regulatory surcharges.

[2] Managed services are not addressed in this two-part series.