Negotiating International Telecom Deals
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D.E. Boehling and Hank Levine

Each fall, corporations battle to develop budgets that will improve the balance sheet and (Please, Lord) boost the stock price in the coming year. CFOs have learned that telecom prices are declining rapidly over time, which inevitably leads to demands on telecom managers to reduce spending even in the face of growing use of telecom services. If you find yourself in this position and your company's international usage is significant, an international (global or regional) telecom deal is worth considering.

When global consortia like World Partners (of which AT&T was the leading member) first entered the market, they promised "one-stop shopping" but delivered little more than a single point of contact for customers to place orders and report troubles. Customers who sought global arrangements in hopes of receiving services of consistent quality based on uniform networks and/or simplified pricing across national boundaries were sorely disappointed. The carriers' marketing consortia services offered little more than the lowest common denominator of what was available from each of the participating carriers. Ultimately, most customers found that the burdens of such arrangements outweighed their benefits, and chose not to pursue (or renew) them.

Eventually, the carriers learned that protecting individual territories could not satisfy the needs of multinational enterprises, and they began to invest in building true global networks and developing stronger, network-based affiliations with other carriers to meet their customers' needs. As of 2001, reputable global telecom carriers exist, and their ranks are rapidly expanding. Significant entities in the field include Concert, Cable & Wireless, Global One and, possibly to a slightly lesser extent, Global Crossing and MCIWorldCom. Unlike the consortia that preceded them, today's global carriers offer ways for smart multinational enterprises to leverage international telecom spending into better prices, virtual one-stop shopping, consistent performance and a reasonably stable telecommunications platform - all of which translates into reduced costs for services and vendor management.

Is Your Enterprise Ready?
If your enterprise has significant amounts of global telecom traffic that is concentrated in particular geographic areas, you may be in a position to negotiate an international telecom deal. Such an agreement can be structured either globally (including U.S. traffic) or regionally to cover different operating regions (e.g., Europe, Middle East and Africa, or Asia and Australia). Either way, simply having the global traffic is not enough -- the traffic must not be committed for the long term to another carrier. Once you pass the first hurdle, determining whether your enterprise is in a position to enter an international deal becomes complex, due to the nature of the global telecom market.

On the U.S. telecom front, the battleground is well marked. There is competition in every interexchange and some local markets. With the exception of local exchange service, most U.S. companies do not face a patchwork of different deals with different carriers for each service in each state. They usually have one or two long-distance carriers, who may also provide portions of their local services, and a handful of local carriers (ILECs and perhaps a CLEC). On the domestic front, enterprises are likely to have no more than a handful of carriers, a dozen contracts and a good idea of when each expires.

The international environment is very different. A single international deal may provide services in areas where there is strong competition (e.g., the U.S., the EC, and perhaps Australia or Japan). Where there is a continuing legal monopoly (e.g., China) or competition has yet to develop (e.g., many parts of Latin America), an enterprise must contract with the monopoly carrier (or contract with the global carrier to act as its ordering agent) in each country. Even where there is competition, a company may have international agreements for data services, but limp along in the voice space with separate contracts with one or more carriers in almost every country in which it does business.

If you are considering an international telecom deal, you need to determine whether there is sufficient time to release an RFP, evaluate bids and negotiate a contract before your current telecom contracts expire. It is not unusual for these processes to take a year or longer. If current contracts have either a transition period with price protection or grant your enterprise a unilateral right to renew for a year, you may want to consider these options or at least begin negotiations with your incumbent carriers to extend the term. Otherwise, you may find your enterprise buying at "standard" monthly rates between the expiration of your existing deals and implementation of new services - a costly exercise, as these rates are considerably higher than term rates. You must also determine when your current telecom contracts expire so the services being provided under them can be transitioned to the new global carrier.

Arming Yourself For Negotiations
In March 2000, Business Communications Review published an article, "Arming Yourself for Negotiations," which highlighted issues that are likely to arise, and strategies for addressing them, in virtually all telecom agreements. This article identifies and focuses on issues that are unique to international (whether global or regional) telecom deals or take on added importance in the international arena.

The key point to remember is that, despite the claims you'll hear from international carriers, international telecom agreements are not seamless. The variation in telecom competition among countries and the patchwork manner in which global telecom networks are configured make such claims far-fetched.

For example, in the U.S., competition in the provision of all types of telecom services is not only permitted, but has been encouraged - first, in interstate long distance services after the breakup of the Bell monopoly in 1984, and, more recently, in local services with the 1996 Telecom Act. In each case, carriers that wish to provide telecom services to their customers may do so either by constructing their own facilities or by reselling services offered by existing carriers. This is not the case across the globe.

Although virtually all countries extol the virtues of telecom competition, many have yet to put it into practice. As a result, a global carrier that is not the incumbent monopoly telecom provider within a country often cannot provide services to multinational enterprise customers there. In some cases, the global carrier may act as your agent to place orders with, report troubles to and pay bills rendered by the incumbent provider, but the global carrier is simply acting as the middleman -- your enterprise remains the customer of record and is responsible directly to the incumbent provider. In certain countries such as China and Thailand, even agency arrangements are forbidden, and an enterprise's operating entity within the country must itself place the order for the services with, report troubles to, and pay bills from, the incumbent provider. While the situation is not ideal, it is also unlikely to be a surprise to your operating entities.

Moreover, a global carrier may not own/control all of its network facilities. For example, even the largest international carriers (e.g., Concert, C&W, Global One) do not own facilities in key areas, such as China, Thailand, Singapore and Australia. This is due in part to the pervasiveness of monopoly telecom providers, and in part to the enormous cost of constructing a global network. Where competition is permitted, global carriers provide telecom services across numerous jurisdictional boundaries through a multitude of subsidiaries and affiliates operating in particular countries, and through intricate relationships with other telecom service providers for coverage where they lack facilities of their own.

As a result, while global carrier may initially tout a deal as a one-stop shopping arrangement, some (e.g., MCIWorldCom) may initially insist that you execute separate, country-specific agreements with the carrier's local operating entities. Some of the terms and conditions in such agreements may be necessary to comply with local law; others, however, may be designed to undermine the uniform pricing and service quality ostensibly offered by the global carrier. Each term of a country-specific agreement should be analyzed to determine whether it is a necessary evil or shifts the devil to the details in the hope that it will be overlooked.

Minimizing the Seams
Given these circumstances, global carriers almost always seek to shift the risks of pricing and performance to the customer. A well-informed and well-prepared customer can avoid these pitfalls.

*Obtaining the Quoted Prices: At least in areas where telecom services are closed from competition, pricing from global carriers often is based on the then-current pricing charged by the monopoly provider and undisclosed assumptions (e.g., individual dedicated circuit terms of 3 or even 5 years). The global carrier is unlikely to highlight that the prices quoted reflect the monopoly provider charges in place at the time a quote is rendered, and that it will "pass-through" whatever increases are announced after the services are installed.

Since your enterprise will be the customer-of-record for such services, the quote is virtually risk-free to the carrier. You will simply pay the amount due, and any early termination charges imposed by, the monopoly provider. For example, if the international contract is for 3 years, but the monopoly provider's services are not implemented until the 6th month following execution of the contract, terminating the telecom services at the end of the international contract term would be an "early" termination of the monopoly provider's services, which likely connect to the global carrier's network and cannot be reused.

This situation can lead to problems if your enterprise's budget is based on all of the prices quoted by carrier - not just those where competition is permitted. Users should seek to shift at least some of the risk of price increases for such services to the global carrier. You can do so by including a credit in the rates and charges equal to some or all of the difference between the prices you are quoted and the amounts that your enterprise is ultimately required to pay the monopoly provider for service. Insist that the credit be applied against the rates and charges for services provided in areas that provide carriers the greatest pricing flexibility (e.g., Australia, United States) in order to minimize the risk of any regulatory issues arising from the credit arrangement.

*Getting High-Quality End-to-End Service: Global carriers also are known to offer what at first glance appear to be end-to-end, high quality, performance specifications, only to include mechanisms in the contract that avoid these obligations. For example, they may ask your enterprise to sign a country-specific agreement that lowers the service quality within the particular country, ostensibly due to performance problems with the local provider, or seek a clause (i.e., force majeure) that excuses the carrier from service or delivery failures attributable to its subcontractors, suppliers and agents, including (but not limited to) PTTs.

Just say no. Although you should expect some variation in service quality between regions, especially with services for which there is no redundant or back-up line or facility, you should not concede to bifurcating end-to-end service quality based on country boundaries. For example, a connection from Bangkok to Singapore should have a single end-to-end service quality standard, not one that is derived by combining performance parameters in each country through which the connection passes. The carrier also should be fully responsible for the services performed by its subcontractors, agents, and access providers. Although, the carrier should be encouraged to factor its experience with underlying providers into its performance and delivery obligations, it should be required to live by those obligations once they are established.

*Protecting Against Changes in the Global Carriers' Relationship with Other Providers: As mentioned above, the affiliate, subsidiary and other relationships through which global carriers provide services to their multinational customers are complex. Add to this the fact that global carriers may want to raise cash for newer projects (e.g., high bandwidth, Internet-focused services) during the term, and you may find that the carrier with which your enterprise contracted is selling off the facilities over which it was providing services (as C&W has done in Hong Kong and Australia over the past year). The carrier will assure you that its performance will not be affected by the sale, but you probably chose the carrier because of its reputation with customers in the area, not the compensation/credits you will receive if the carrier fails to deliver.

A multinational enterprise is unlikely to be content simply with the performance obligations established prior to a divestiture and the ability to collect credits if contracted levels of performance are not delivered. You should seek additional protections, including obligating the global carrier to subcontract the performance of services to the divested entity and escalating performance credits and termination rights should the divested entity fail to maintain the quality of service in place prior to divestiture. The latter obligation could be - and is -- also used to protect an enterprise if the global carrier is purchased by another entity (i.e., undergoes a change of control).

Unique Pricing Considerations in International Deals
*Pricing Structure: In U.S. deals, cafeteria-style pricing is the norm. A customer has separate pricing for an access line, a PVC and a port, which can be combined to establish the end-to-end price for a connection.

By contrast, global carriers often quote international prices based on a bundle reflecting the customer's then-current telecom services arrangement. While this approach may be essential for your enterprise's budgeting process, it deprives the customer of flexibility to alter telecom services based on pre-negotiated prices during the term.

While you can negotiate different "bundles" of prices for various sizes of services, bundling limits your choices during the term of the contract. Instead, you will get the most flexibility and the most favorable pricing by negotiating individual prices for various capacities/speeds of each component of the service (e.g., local loop, international private line circuits, PVCs, ports) in addition to bundled prices before signing on the dotted line. You will then be able to obtain a new "bundle" of services simply by ordering a combination of the components on the pricing sheet.

* Hidden Costs: In both U.S. and international deals, customers need to worry about hidden costs - additional charges not listed on the pricing sheet. In U.S. deals, these are most often found in the carriers' tariffs - e.g., termination charges often include amounts paid to third parties as a result of early termination of the contract. While the reference to third-party costs is important in U.S. deals, it poses less risk there than in international deals.

In international deals, carriers are much more likely to rely on other carriers to provide portions of their transport services (e.g., the local loop) and on subcontractors to provide on-site installation and repair services to their customers, and they are more likely to have entered into multi-year commitments (e.g., for access circuits) to get acceptable pricing.

Customers should seek to identify these costs up front, and to minimize them wherever possible. For example, customers should verify that an installation waiver includes charges imposed by the local supplier - not just charges imposed by the global carrier. If it does not, you should demand estimates of these costs and factor them into your budget.

Likewise, if your enterprise requires installations and/or repairs to be performed on an expedited basis and/or outside of normal business hours, you should verify that the waiver of any additional charges for services performed on this basis covers both the global carrier's charges and their underlying local supplier. This is particularly true in the case of a monopoly provider on whose behalf the global carrier is simply acting as an agent, as you would ultimately be responsible to the monopoly provider for any such charges unless the global carrier provides you an offsetting credit for such charges.

* Price Reviews: Ensuring that the contracted rates remain competitive throughout the term is essential in any telecom deal. The risk of failing to obtain appropriate pricing protections in international deals is much greater than it is in the U.S. because competition is just emerging in certain markets, and because prices are dropping so quickly that an agreement that is competitive at the beginning of the year may be wildly overpriced six months later.

Global carriers that have invested in facilities or are seeking to make a name for themselves by attracting a well-known multinational enterprise as a customer may be willing to offer attractive pricing. You will want to take advantage of this not only at the time you enter into the deal, but as you progress through its term. With some prodding, global carriers will offer a "we'll talk" clause that obligates the parties to negotiate new rates during the term, but permits the carrier to extract concessions in return for market competitive prices (e.g., extension of term, increased revenue commitment).

But don't be fooled. You need a rate review mechanism with teeth - one that assures that your rates will remain relatively competitive throughout the term. You can accomplish this in a variety of ways, notably by establishing mechanisms that encourage the parties to agree on improved pricing (e.g., if the parties don't agree, the carrier can keep its rates high but the customer can reduce its commitments), or procedures for a neutral third party to evaluate the competitiveness of the rates and order rate reductions where they are not competitive.

In any such process, beware of carrier efforts to restrict comparisons to "similarly situated" customers with a "similar mix of traffic and circuit configuration." When push comes to shove, we have never found a carrier willing to agree that any customer whose rates are lower than a client's rates is "similarly situated."

* Billing Structures, Currency Conversion, VAT: U.S. deals are governed by a single currency, have relatively straightforward billing structures and, with the exception of state-specific taxes, do not change based upon the location to which a bill is rendered. This is not the case with international deals. Because of VAT and other taxes, the operating entity to which, and the currency in which, a bill is rendered can have a tremendous impact on the cost of service.

If your enterprise is considering an international deal, investigate the structure that best meets your enterprise's tax planning needs and demand the carrier to adhere to this structure. Because revenue commitments are made in a single currency, most customers prefer that their prices to be set in the same currency. But if you then require the carrier to render bills to local divisions, offices or operating entities in local currency, the contract will need to establish currency conversion mechanisms and address fluctuations in exchange rates between the time a bill is rendered and paid. Carriers tend to find such exercises very expensive when they are requested after a deal has been concluded.

* Testing the Waters: The idea of an international deal may be difficult for your enterprise, because of concerns about carrier performance across different geographic regions. If so, you may want to enter into an international contract that obligates the carrier to prove its ability to perform at a few test offices - a form of expanded pilot for the services. If the services fail to meet spec or expectations in a "live" customer environment at those offices, your enterprise would then have a right to terminate the contract without termination liability. You've lost time, but you have also avoided a potential long-term disaster.

Conclusion
Although competition has come (or is coming) to many places throughout the world, many jurisdictions continue to require carriers to notify the regulatory agency - and, in some cases, obtain approval in advance - for custom pricing, terms and conditions. In such circumstances, you will want to make sure that the carrier is obligated to take any and all action required for the contract terms to be enforceable, and to coordinate implementation of the services with the time required for a regulatory agency to approve the pricing, terms or conditions for the services within the affected country. You will also want to secure protection against changes in the documents on file with the regulatory agency that materially and adversely affect your enterprise.

It is difficult to focus on protecting a customer from a deal gone bad when one is negotiating to create a durable relationship with a service provider. Seeking this protection, however, is essential in global deals where the carrier and customer may have headquarters in different countries and be organized under different laws. These differences can be critical if and when a customer is entitled to remedies under the contract. In order to evaluate the risks imposed by these circumstances, you will want to know up front which carrier entity will execute the contract, the country(ies) in which that entity is organized and operates, and the value of the entity's assets. You will also want to determine whether the assets are sufficient to cover the damages to which the customer may be entitled under the contract and whether they are "reachable" - i.e., can the multinational customer enforce an arbitration award or court judgment if it needs to.

International telecom deals have advanced to the point where they offer high-quality end-to-end telecom service over stable platforms, with attractive pricing. But caveat emptor still applies. Multinational enterprises searching for these benefits need to come to the table aware of the unique issues raised by these deals, and be prepared to address them.