After negotiating hundreds of contracts, from dozens of carriers, for clients ranging from global 50 to $50M/year in revenue, I feel I have a unique perspective on this topic. In my experience, I have found that revenue commitments, are to a large extent, arbitrary. Although contrary to popular belief, I regularly find that companies who spend $1M/year will get better rates than companies who spends $10M/year with that same vendor. (I will explain why and how to avoid this phenomenon in another post).
Vendors would prefer that you commit 100% of your spend… forever. Typically, vendors will come up with a commitment figure that is 80% of your annual spend. We usually recommend that clients commit no more than 60% of their projected spend over the term, not per year. I will demonstrate below why term based commitments are superior and why you would want to stay away from monthly and annual commitments. For an example, I will use a customer that spends $100k/month or $1.2M/year on a 20 site voice and data network.
These are the most commonly offered terms. Even if a customer spends 10x the sum of all three years commitment, in the first year, the customer will still be liable for the annual commitment in years two and three. These types of commitments are the most restrictive and, if possible, should be enthusiastically avoided. Some of the terms associated with these types of commitments includes:
The table below demonstrates the one of the most negative aspects of an annual commitment.
|Year 1||Year 2||Year 3||Totals|
|% Of Annual Commitment||60%||60%||60%|
|Annual Committed Spend||$720,000||$720,000||$720,000||$2,160,000|
|Number Of Spend Months Required Each Year To Satisfy Commitment||8||8||8|
|Number Of Months Remaining Before Auto-Renewal At The End Of The Term||2-3|
In this case, the customer has already spent more than the aggregate committed dollar amount by month 21. Since the customer still has the 3rd year commit to satisfy, the customer is stuck for the duration. During year 3, the customer will still have to give the carrier an additional $720K to satisfy the 3rd year annual commitment. In effect, the real commitment ends up being $3.12M. ($2.4M for years 1 and 2 + $720k for year 3) Unfortunately, most of the agreements we see before renegotiating have a 30-60 day auto-renewal clause. By the time your company has satisfied the commitment, there is only 2-3 months left to do anything about it. Since the incumbent knows it can take 4-6 months to move a large data network to another carrier, the customer no longer has any leverage in the form of a credible alternative. Advantage: (Vendor)
If interval agreements represent (the stick), attainment agreements represent (the carrot). Attainment agreements create the feeling that you’re not being forced to spend money with the vendor. This is true. However, if not structured correctly, they can be equally restrictive when it comes time to renew an agreement. If the discount tiers and the requirements to reach them are not carefully negotiated, drops in spend or movement of business elsewhere can reduce the discounts enough, on the remaining spend, to be cost prohibitive. ATT and Verizon use both the carrot and the stick. If you sign a revenue commitment with carriers like this, they will be happy to give you huge (60-90%) discounts off their standard tariff prices. Only when the carrier has delayed the renewal proposal long enough to leave you with no other options, you realize that if you do not renew the agreement, your costs will go back up by that same 60-90%. Advantage: (Vendor)
This category of revenue commitment takes into account your total projected spend during the entire contract period. Some of the terms associated with these includes:
Note: Vendors do NOT like to agree to these. In most cases, the carrier will deny that they have ever offered them. Having the right negotiating strategy is critical. As long as you have someone on your team that has either negotiated these types of commitments before and/or has evidence that the carrier has offered these terms to other companies, you will have a better chance of success.
In this example, the 60% revenue commitments remains the same however, we have removed the annual minimum requirement.
|Year 1||Year 2||Year 3||Totals|
|Total Committed Spend Over 3 years (60%)||$2,160,000|
|Number Of Spend Months Required To Satisfy Entire Commitment||22|
|Number of Months Before Renewal With No Revenue Commitment||14|
By taking this approach, the customer satisfies the total $2.1M commitment in month 22 of 36. This means that the customer no longer has any obligation to the carrier, but the carrier is obligated to keep the current rates and terms in place for the next 14 months. The customer is in complete control at this point. Figuratively speaking, the Sword of Damocles is transferred from over the head of the customer to that of the carrier. Negotiating from a position of complete control enables our clients to get better SLAs, terms and pricing than companies with a less favorable negotiating position. Advantage: (Customer)