The Hidden Cost of Loyalty
In all service relationships, the quality of those relationships will have a significant and direct bearing on the perceived quality and value of the service being purchased. All credible suppliers take great care and place significant emphasis on building and maintaining great relationships with their customers. The supplier goal is to build loyalty which serves as an excellent defense against the encroachments of competitors. At the end of the day, people like to do business with people they like and have come to know. The telecommunication carriers have invested heavily in building loyalty within their enterprise channels which have traditionally been one of their most profitable market segments. In telecom sourcing, relationships and the underlying loyalty is a major obstacle that must be overcome in order to negotiate a world class telecom contract.
Understanding this dynamic is critical for any enterprise seeking to attain or maintain a market leading contract.
The financial benefits of loyalty primarily benefit the supplier or in this case the underlying carrier. This is not to dismiss the value of quality relationships and the benefit that is derived from them; but clearly on financial issues the carrier alone benefits from loyalty. Non-financial benefits that typically accrue to the enterprise can include: 1) enhanced responsiveness to problems, 2) proactive oversight on new installs, 3) sheer enjoyment of working together, and 4) access to major social and networking events such as golf tournaments and sporting events. Notice that getting better prices or getting better contract terms are not on the list of enterprise benefits. The bottom line is that loyalty provides financial benefits to the carrier and results in the enterprise paying higher rates than if there was no such loyalty. While this may go against conventional wisdom, it is indeed a universal truth.
I believe this is wrong and that loyalty should truly benefit the buyer financially. I have personally got ticked off in the past year when I realized my personal loyalty in buying things such as home Internet services, cable TV and utilities (natural gas) was costing me money. New customers were being offered much better rates and service packages than what long term loyal customers were getting. I was mad and took action dropping some vendors and getting sweeter deals from other suppliers. These same dynamics of loyalty apply across all market segments and especially when the stakes are high like in enterprise markets.
Great relationships can and should be established however business should be earned on its own merits. When outside influences are brought in, and one begins rationalizing loyalty into one’s sourcing initiatives, one is walking a slippery slope. Because of great “relationships” in my experience, the enterprise team believed they were getting a very good deal and getting special treatment. In most cases I have been involved with this was rarely the case. What I saw was the carrier charging significantly more than the best deals they had freely offered for comparably sized customers, especially when those other customers were not currently their customers. When I ran carrier pricing for two of the largest national US carriers, the first question we would always want to know is “how is the relationship”. We asked this question because if the answer was very good or strong, we knew we did not have to lead with our very best pricing. We would always have another chance if we priced too high.
Another factor considered when determining how aggressive to price an offer would be ascertaining what the cost of change was for the customer to move to a competitor. The costs of change can include capital, manpower resources, duplicate network costs, and higher prices in the interim; and carriers will attempt to estimate this and use it to justify their pricing response if their loyal customer complains. It is a fact of life that incumbent carriers like to point out the cost of change whenever they are challenged on their seeming non-competitiveness on price. The good relationship adds another layer of comfort to the incumbent carrier and together leads to suboptimal responses to enterprise carrier renegotiations and/or formal RFP initiatives.
The challenge for the enterprise is to get the carrier to understand their mindset. In the enterprise mindset, neither costs of change or loyalty should be used against them. Customers should expect their loyalty to be financially rewarded.
Recommendations for the Enterprise
Few enterprises want to change providers and this is especially true if there is loyalty established. But I believe these preferences and in some cases predetermined outcomes need to be set aside and totally removed from the enterprise mindset during competitive procurements or renegotiations with incumbents. If one shuts out true competition, not only will they potentially miss out on a pioneering offer from a hungry non-incumbent, but they will lull the incumbent into a sense of complacency and comfort regarding what they need to do to retain the existing business. We recommend the enterprise live by the adage: Relationships can be built but business must be earned!
Specific tactics TelAuthority highly recommends include:
Competitively bid services, even informally every time. You just don’t know what you don’t know. The telecom market shifts all the time and what you believe is a great price may be yesterday’s news. You just may be surprised at what happens and the injection of competition will keep your incumbent honest in the process. If properly coached they will have a higher bar to clear to re-earn the enterprise customers business but the enterprise must make it clear they are willing to move if financial logic compels them.
Engage true third party experts to help speed you through the formalities of competitive bidding. Left to the carrier devices, this process can take many months longer than it need to and time is indeed money when prices continue to fall. True experts will also provide validation and an unbiased expertise into the negotiations and analysis. Know what you are getting and how it compares to the best in the industry. Make informed decisions knowing your options and understanding the market and how your new deal stacks up.
Be indignant anytime an incumbent carrier plays the cost of change card as their rationale for submitting an offer that is not competitive with the other providers that want your business. If a carrier plays this card, they are admitting that your continued loyalty will costs you in the form of higher rates. Just say no.
An enterprise should absolutely seek to have the highest quality and best relationships with their telecom suppliers. This can be accomplished but does not need to come with the hidden cost of paying the higher prices that do not reflect the leading edge of the market. Blind loyalty can indeed cost an enterprise millions of dollars per year. Be loyal but not blindly loyal, there is a difference. One should never have to apologize for demanding a market leading contract. Having a great relationship and achieving a world class contractual outcome do not have to be mutually exclusive outcomes.
TelAuthority is the trusted advisor and acknowledged industry expert to assist large enterprises in navigating this complex and challenging process. Please contact us for more information or to discuss the unique challenges faced by your organization.
Written By: Pete Wilson, CEO, TelAuthority, LLC