Controlling Connection Costs

Dec. 21, 2004
Reviewing, managing telecommunications can yield savings.

When David Rosati, financial controller with $1.5 billion Del Monte Foods Co., began reviewing the processes his firm was using to manage telecommunications expenses, his immediate concern was boosting efficiency. Just a year ago, Del Monte was processing some 2,800 telephone bills each year, burying the accounts payable department in paper. "I was trying to take out non-productive processes," says Rosati. He got more than he bargained for. Employees of QuantumShift Inc., a Novato, Calif.-based provider of telecommunications solutions reviewed Del Monte's phone bills and found that one of the company's data lines was being routed through its local carrier rather than going directly to its long distance provider. That boosted the tab by about $80,000 annually. In addition, Del Monte had been picking up the bill for a phone line belonging to one of its subcontractors, who happened to be located in the same building. That cost came to $60,000 each year for the San Francisco-based company. Why did the unnecessary charges go undetected for so long? Growth in telecommunications technologies and services at many companies such as Del Monte has outpaced the ability to manage that growth. The good news is that there are things a company can do on its own and with the help of telecommunication-management vendors that can reduce such costs. Over the past decade, telecommunications costs have jumped dramatically and today often rank among a company's top 10 expenses. Also problematic: Telecommunications costs tend to be disbursed throughout the financial statements and don't appear as a single line item. In a recent white paper, John Dretler, senior vice president of sales and marketing with Info Group Inc. of Framingham, Mass., reports that just five years ago, 60% to 70% of a company's telecommunications expenses came from calls made via the PBX, or private branch exchange, which is used to switch calls between internal extensions and outside lines. Today, such calls account for less than half of the typical company's total phone costs. The rest comes from pagers, e-mail, wireless phones, the Internet, data transmission and other recently developed telecom practices. What's more, the overcharges that appeared on Del Monte's bill are not atypical. While estimates vary, some studies have shown that nearly three-fourths of phone bills contain errors, says Gerry Crooks, president and CEO with Spokane, Wash.-based Avista Advantage, a facilities management-consulting firm. Given that corporate phone bills can run to hundreds of pages, many managers just throw up their hands and pay. However, executives can rein in their firms' telecommunications expenses. They need to figure out what their companies currently are spending on products and services, review cost-saving technology, develop appropriate corporate telecommunications policies, and intelligently negotiate with telecommunications carriers and service providers. A comprehensive plan for managing telecommunications costs can cut between 5% and 25% from a firm's phone bill. Getting Started A first step is to calculate what the company now is spending on phones, lines, data communications, cellular usage and the like. Typically, this means combing the financial statements to uncover just where all the costs are buried. For instance, calls made from cell phones may appear in travel and entertainment expenses, while the cost of data lines probably is included within IT expenses. It pays to scrutinize invoices. Nearly every company has lines that no longer are in use but are still connected or cell phones that haven't been retrieved from former employees. Or, as Rosati found, a company's long distance calls may be going through its local exchange carrier rather than straight to the long distance company. The overcharges can be up to 10,000% more than the price the firm thought it was paying, says Bill Moore, a San Francisco-based senior manager with PwC Consulting's telecommunications and network practice. Because the calls are not covered by any pricing plan, the price often jumps dramatically, says Dorothy Lockard, president of the St. Louis, Mo.-based telecommunications consulting firm, Dietrich Lockard Group. An automated asset management application can help companies get a handle on just what systems, tools and products it has in place. That's especially important as a company grows, and manual systems quickly become incapable of keeping up with the expanding systems, says PwC's Moore. Figuring out what the company has been spending is half the battle. Managers also need to review any telecommunications policies in place. For instance, if each office has been negotiating on its own with telecommunications carriers, management may want to centralize the function to take advantage of volume discounts. Controlling Cell Phones Another area that often warrants review is the criteria used to determine who in the company qualifies for cell phones. Moore advising asking, "Does this person really need to be contacted outside the office?" A company-provided cell phone tends to become a status symbol, and the assumption is that it's an inexpensive one. That's not necessarily the case. Companies typically spend 20% to 40% more on cell phones than they realize, says John Merritt, vice president of marketing with traq-wireless, an Austin-based provider of wireless management solutions. For instance, employees may be making calls outside their billing plan hours, which will fail to qualify for negotiated rates. Some companies, such as Prestolite Electric Inc., a $170 million manufacturer of motors and industrial components based in Ann Arbor, Mich., have refused to even get into the cell phone business. Employees buy their own cell phones, and include any work-related long distance charges on their travel and entertainment reports, says Dan Bartels, director of IS. "As far as cell phones, we don't touch them," he says. Having employees include cell phone charges within their T&E reports can enhance control, as a manager has to sign off on the expense. On the other hand, the company typically loses the ability to pool employees' minutes and obtain discounted rates, notes Moore of PwC. Reviewing New Technology Another part of developing cost-effective telecommunications policies is looking at new technology and its abilities to reduce costs. Distinguishing between hype and reality is key. One technology that's capturing attention right now is what's known as voice-over-Internet-protocol, or voice-over-IP. Essentially, this refers to using the Internet to transmit voice traffic. Voice-over-IP promises to cut phone costs, as both voice and data will flow over the same networks. However, claims that such calls will be free are wrong, say telecommunications experts. For starters, not all voice-over-IP calls will travel via the Internet; some will require traditional phone lines, says Roger Oustecky, vice president and COO with Tenet International, a consulting firm based in Castle Rock, Colo. Industry experts currently are debating just how to charge for such calls. Oustecky also points out that taxes account for about one-third of the typical phone bill. Given that telecommunications is a $200 billion industry, it's unlikely Uncle Sam will let this revenue source simply dry up. Finally, voice-over-IP technology isn't yet as reliable as traditional phone systems. Some features that now are standard in many phone systems, such as a message-waiting light, currently are not available in voice-over-IP technology, says Don Dietrich, vice president with Dietrich Lockard. For now, voice-over-IP conversations may work best when the traffic is moving over a virtual private network. With a virtual private network, a company reserves a set amount of bandwidth on the network, Dietrich says. Virtual private networks can be cost-effective for companies with large numbers of mobile users, as they allow them to more cheaply access e-mail. Rather than making a long-distance call to their offices, the employees can make a local call to connect with their ISP, and then hook into the e-mail system, says Moss Crosby, vice president of product development with ITC^Delta-Com, Inc., a West Point, Ga.-based telecommunications solutions provider. Armed with information on costs, services and technology, a telecommunications manager should be able to effectively negotiate with telecommunications providers, says Oustecky. "The more informed you are regarding what you have, the more you'll be able to sway the vendor." Surprisingly, many companies appear to skip this step. "It's amazing how many times one company pays two times what another is," says Mitch Weiss, product manager with ISI Inc., a Schaumburg, Ill.-based provider of call accounting software. Currently, long distance rates range from about 4 cents to 12 cents per minute, although very large firms may be able to squeeze a bit more, he says. One key to capturing competitive rates is making sure the telecommunications contracts allow for adjustments as rates decline, says Michael Schumacher, a Dallas-based telecommunications financial management practice leader with consulting firm KPMG, New York. "You want to structure agreements that allow you to stay competitive over time," says Schumacher. He notes that voice rates have been dropping between 6% and 10% annually since at least the mid-1990s, a trend he expects to continue. You also want to be able to migrate to less expensive technology as it becomes available, says Schumacher. An example: A contract may require a company to spend $6 million annually on voice communication, with $2 million of that figure coming from international traffic. Say a company changes from dial-up to remote access for its international calls. Remote access can be less expensive, as calls are transmitted via the Internet, rather than regular phone lines. However, the company may fall short of the $2 million and $6 million targets, and become subject to penalties. Some companies are negotiating for the right to adjust their volume as their business changes. Electronic System Products (ESP), working with Tenet International, re-negotiated its telecommunications contracts to include a business downturn clause. In the event that ESP's market takes a tumble, the dollar amount the company is obligated to spend on phone calls will be adjusted accordingly, says Ladd McIntosh, director of operations with the Duluth, Ga.-based contract engineering firm. The experience of firms such as ESP and Del Monte show that taking a good look at telecommunications costs can pay off on the bottom line. Although this is one expense that tends to be overlooked, "It is real money," says Rosati of Del Monte.

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