[This is the third in a series of posts by Bob Butler on the Fine Art of Telecom Transactions. In the first installment, he cautioned about the needs to plan early and to understand the structure ad interrelationships of the deal documents. In this and the other installments in this series, he identifies more factors to watch out for in the drafting process.]
Tip No. 5 – Watch for Term and Commitment Traps
Most telecom contracts specify a minimum financial commitment – the dollar spend for services you agree to buy, whether annually or over the life of the contract – and a minimum time commitment, or contract term, which typically runs three-five years. To maximize your flexibility and leverage, you should: (a) opt for shorter terms (no more than three years except in specialized cases, such as fiber build-outs); (b) commit to no more than 60-70% of your expected actual spend; (c) make the commitment only over the full term of the agreement rather than annually or with respect to particular services; and (d) secure a termination right that will kick in whenever you reach the committed spend, even if early in the term. The idea is to make it as easy as possible for you to satisfy your commitment, with the additional benefit (and inducement) of being able to terminate the deal once you have met that commitment.
Of course, even the best laid plans often go awry, so it’s also a good idea to consider, and protect against, unfavorable scenarios. For example, despite your best efforts, you may not satisfy your commitment. Recognizing that up front, you should not agree to 100% shortfall liability in the event of such a failure. In my experience, 25-50% is more typical, and it’s often possible to further cushion the blow by negotiating rollover or work-off options as well. You should also ensure that you are not obligated to pay both shortfall and termination liability changes if you exit the contract early without cause or the carrier terminates you for breach. You certainly don’t want to pay what would amount to a double penalty for early termination.
Finally, beware of perpetual agreements that lock you in for so long as any minimum service order term (typically a year or longer) remains unexpired. As I’ve cautioned in the first two installments of this series, telecom deals are complex arrangements with multiple separate but interrelated components. Be on the lookout for any provisions that could keep you on the hook longer than you are prepared to be kept there.
Tip No. 6 – Cloud or Data Center?
If information processing is an integral part of your telecom needs, you will have to decide whether to go with cloud computing or set up your own equipment in a data center/collocation facility. As with most such options, there are upsides and downsides to both sides.
With cloud computing, you are acquiring a service application hosted and managed by a remote vendor over a shared platform. This reduces required up-front investment, since you’ll be relying on the service host’s facilities instead of buying or renting your own. Additionally, the cloud provides increased scalability: expanding available resources is just a matter of signing up for greater capacity – no need to buy any more gear or arrange for integrating that gear into your operation.
The downsides to the cloud? You’ll have less flexibility in the choice of services and vendors, and you’ll face heightened security and privacy risks. When you’re relying on a remote vendor to host your information, you’ll be counting on that host to assure adequate protection for that information. You will also be at the host’s mercy when it comes to technical changes that could require expensive upgrades to (or replacement of) your interconnected systems, software and equipment.
In contrast, opting for having your own servers hosted at a data center with multiple carrier connections gives you exclusive control over the storage and processing of your content while offering variety and diversity in your transport options. But those options entail additional immediate and ongoing costs. And you’ll be responsible for security and privacy protection.
The nature of your business, the sensitivity of your data, and the types of services you wish to acquire should guide you in deciding whether to go to the cloud or stick with a data center.