Charles A. Tyrrell, C.P.M., A.P.P.
Charles A. Tyrrell, C.P.M., A.P.P., Procurement Specialist Newcourt Financial/AT&T Systems Leasing, www.newcourt.com, Bloomfield Hills, MI 48303, 248/339-1566, Chuck_Tyrrell@newcourt.com
Abstract. The convergence of voice, data, video, and the Internet makes the purchasing decision between telecommunications providers much harder than in the past. An examination will be made of the market forces that are driving the convergence of the technologies and the providers of equipment and services.
Telecommunications Act of 1996. The Telecommunications Act of 1996 was signed with great fanfare by President Clinton who took credit for the Act. In fact the work leading to the signed bill was several years in the making. The Act was the first major change to U.S. telecommunications policy since the creation of the Federal Communications Commission (FCC) over 62 years before. The FCC has been tasked with devising the rules and regulations to implement the provisions of the Act. The Act has set the stage for competition where there had been none in the past and the rapid deployment of new technologies and services. None of this has yet happened.
Local service competition has the potential of becoming one of the most visible of the changes brought by the Act. As a condition of local service providers, or Local Exchange Carriers (LEC's), being allowed into other service businesses, most notably long distance, they must open their local service areas to competition. Competition in the local service market is not happening quickly. The incumbent, monopoly carriers are dragging their feet about opening their markets.
In spite of the hurdles erected by the LEC's a new breed of service provider has emerged, the Competitive Local Exchange Carrier (CLEC). The CLEC's are concentrating their efforts in major metropolitan areas and the large business customers within those areas. The penetration rates of CLEC's are generally less than 5% of the lines within a given area. In some areas total CLEC penetration is less than 1%. Clearly the intent of the Telecommunications Act is not being achieved.
Lawsuits have become the mode of competition. Whenever another company tries to enter a local market the incumbent LEC generally files suit or files a protest with regulatory agencies. When the LEC's have made application to enter the long distance business the long distance service providers have also filed suit and protests with regulators.
Regulatory Environment. The world of telecommunications is changing faster than the agencies whose charter it is to regulate the providers. In the United States telecommunications is regulated at the Federal level by the Federal Communications Commission (FCC). There are also regulations imposed by each of the States' version of a public utilities commission. The result being a confusing array of service offerings at widely differing prices. For purchasers of telecommunications in multiple locations achieving similar services for each location will be very difficult and the prices, terms, and conditions will vary.
Mergers & Acquisitions. Since the passage of the Telecommunications Act business combinations have been running rampant in both the equipment manufacturing and the service provider marketplaces. For example Southwestern Bell merged with Pacific Telesis to form SBC Communication. SBC then purchased Southern New England Telecommunications, and now has a merger pending with Ameritech. If the Ameritech deal is completed then SBC will control approximately 40% of all of the local telephone lines in the United States.
Business combinations are also the rule in the equipment marketplace. Companies are growing by buying the expertise that they need. Cisco Systems for example acquired eight companies in 1998 and six in 1997. One of the largest telecommunications equipment business combinations is the acquisition of Bay Networks by Northern Telecom. The Bay/Northern deal was valued at $9.1 billion when it closed on August 31, 1998
Distance. Distance had traditionally been a factor in telecommunications services pricing. A call across the street was less expensive than one across town, which was in turn less expensive than a call across the state, which in turn was less expensive that a call across the county. Now there are calling plans that are distance insensitive, "Call anywhere for 10 cents per minute".
Internet. The Internet started as a means for research universities, military contractors, and government agencies to communicate. The Internet was designed to keep operating even if one or more sections were destroyed in a nuclear attack. In 1972 the government opened what has become the Internet to more users. By 1975 there were 75 sites connected and by 1980 there were 205. In the 1980's the National Science Foundation ( NSF ) took control and connected its supercomputers to the budding network. In 1991 the separation of the network from commercial interests fell, and in May 1995 the NSF terminated funding for the network backbone and handed over its responsibility for domain name registration to a for-profit corporation which quickly moved to commercialize the Internet. By this time there were over 1 million computers linking over 30 million users to the Internet. The advent of the World Wide Web ( Web or WWW ) has quickened the pace of Internet growth. Some estimates have the Internet user base doubling every six to twelve months. The Web provides for graphical presentations of material in addition to text. In spite of the wonderful graphics available on the Web by far the vast majority of Internet traffic is electronic mail. When evaluating an Internet Service Provider ( ISP ) two major issues to be addressed are the technology and speed that you are able to connect with the ISP and the technology and speed that the ISP connects to the rest of the Internet. Internet connections are only as good as their weakest link and the two weakest, and the most actionable, are between the user and the ISP and the ISP and the Internet. A fallout of this investigation is where are the ISP's connection points in relation to where it will be used. The distance between the ISP connection and the user can have a large impact on the total cost of using the service.
Internet Telephony. Internet telephony began when a group of computer buffs searched for a way to digitize and send their voices through the Internet. By piecing together equipment, they were able to send the resulting packet bit stream through the Internet.
This early Internet telephony was wrought with problems. First, the process was tedious. Calls had to be manually created and both parties needed to do extensive work to establish every call. Another drawback was voice quality that was often so poor that speech was unintelligible. Long delays were also commonplace as the packets traversed the various paths of the Internet and were reassembled at the receiving end. And since only half-duplex conversations were possible, this inconvenience posed other limitations.
This group of dedicated "techies" persisted and had fun as they made long distance, and even international, voice calls for free. Their early experimentation led many to see the potential for widespread commercial use. At the same time, however, they also realized that to commercialize Internet telephony would require many hurdles to be cleared.
Many equipment and service suppliers are working to introduce products that solve the issues. At the same time, they are expanding the scope of functionality to include connectivity across all IP based networks, not just the Internet. The term for this broader service is Voice Over Internet Protocol (VOIP).
The service providers see themselves as competing with traditional telephony service providers such as AT&T and Sprint. At the same time, the traditional carriers see the growing market potential for VOIP service and now offer their own VOIP service. Products are also coming into the marketplace that move facsimile and videoconferencing from the public switched networks to IP based networks, integrating all communications into one network.
Companies interested in utilizing VOIP can create their own service. Products are available to assist with this customization. For example, an organization can route voice calls from their private branch exchange over their existing data network. As an added benefit, the voice calls are basically at no cost, should the organization's data network have the capacity to handle the additional traffic volume.
Those who are considering VOIP will also want to be aware of the regulatory environment differences between voice and VOIP in particular, and data services in general. National and local regulators the world over are looking for ways to tax and control these services. The difference in cost between traditional voice calls and VOIP calls is attributed to taxes and regulation costs. The competing carriers are encouraging the regulatory agencies to also regulate data carriers, even Internet Service Providers (ISP's). The purchasers of VOIP and other telecommunications service must keep an eye to the regulators since a decision made in one regulatory environment may not be the same given even a small change in regulations.
While the noted issues and concerns about this technology are cause for thought, Internet telephony is a technology on the rise. Some experts are of the opinion that IP-based communications will eventually replace the public switched network. At this time and for the foreseeable future Internet Telephony is not ready to be extensively used in most organizations.
Convergence. Internet telephony is the first application of the convergence of data, video, voice across a common network. Products have been introduced that offer the promise of also integrating video with the data and voice. There have also been product announcements that will result in lower cost , better quality, and higher reliability for the converged voice, data, and video services.
At this time a converged network is only for the largest and most technically advanced organization. It is very expensive and requires a high level of support operations. Over the next several years these early adopters will drive out the complexity and the equipment manufacturers will drive down the cost.
Fraud. Unauthorized charges and misuse and abuse of telecommunications services are costing organizations billions of dollars per year. The astute purchaser can take steps to protect their organization and contribute cost savings.
Be wary of offers that sound too good to be true, they probably are. Even if the offer is from a known, large company. An example of this that will live long in the minds of many telecommunications purchasers who were deceived by the offer was the Sprint Fridays Free promotion. In the marketing literature purchasers were promised that all calls made via Sprint on Fridays would be free if a $50.00 per month minimum was spent with Sprint. A quick check of the math showed that you could easily use $1000.00 per month on Fridays for the $50.00 minimum. Within the first few weeks of the promotion calls to specific counties were excluded. Other restriction were also added as losses piled up for Sprint. Many customers of Sprint ended up paying significantly more than would have been expected under the terms of the program. Contacts at Sprint were unavailable to customers who had contracted to participate in the program, only to see their contracts being unilaterally changed by Sprint.
Recently there has been a dramatic increase in long distance carriers being switched without the purchaser's permission. This is known as slamming, and it can very often lead to being placed on rate plans that are much higher than what has been contracted with the chosen carrier. When local markets are opened to competition be on the watch for the local service equivalent of slamming. With the volume of expenditures in this area Purchasing should be devoting time to understanding the firm's requirements and the marketplace dynamics for each local market. Matching requirements to existing and proposed offerings can lead to significant cost savings and performance enhancements.
Similar to slamming is cramming. This is where unauthorized services are added to a phone line or lines. These services can include services such as three way calling, caller ID, voice mail, and remote call forwarding, to name just a few. If your service is provided by a private branch exchange (PBX) those services are often included with the PBX and just need to be programmed for individual lines. There is no need to pay the carrier.
Due to the open nature of the Internet, security can be a major concern to any company wishing to attach to the Internet. Hackers and crackers are looking for ways into your computer system. Some ISP's offer firewall service, which is a security system to isolate the user systems from the Internet while allowing information to flow.
Contracting. In the fast changing world of telecommunications, suppliers want to get long term commitments from their customers. In most cases their boilerplate contracts do not allow the buyer to enjoy the benefit of lower prices and enhanced technologies. This like other terms is negotiable. Another contracting strategy is to claim that what is being asked for by the buyer is prohibited by tariff. The tariffs are filings that telecommunications providers make to governmental agencies detailing their offerings, prices, and terms. While tariffs can not be quickly changed buyers can negotiate terms that are not in direct conflict with the terms of the tariffs. Supplier will make claims that the terms are in conflict but put the burden of proof on the supplier. Most purchasers do not have the resources to devote to tariff filings. Every year there are tens of thousands of pages of tariff changes filed every year.
Conclusion. Current technological and market information and clear, written requirements are absolutely needed when purchasing telecommunications products and services. Armed with this information Purchasing can make a significant value-added contribution to their organization.
With the seemingly constant business combinations in both telecommunications equipment and services, purchasers must keep abreast of the changing marketplace. Mission critical equipment and/or services from the users' viewpoint may be eliminated as these combinations look for ways to make the new organization more efficient and reduce costs.