South Africa s Mobile Communications Market: Granny Smiths and Golden Delicious. Keeping Your Deal Competitive in a Rapidly Changing Market

Transcription

1 Suth Africa s Mbile Cmmunicatins Market: Granny Smiths and Glden Delicius Keeping Yur Deal Cmpetitive in a Rapidly Changing Market Justin Crnish The extrardinary activity in the Suth African mbile vice and data cmmunicatins market in the last six weeks has seen Cell C intrducing straightfrward and aggressive pricing fr retail custmers. This is in the face f histrically cmplex pricing structures that average cnsumers struggle t fully understand. These have evlved frm an industry that ver the last 20 years has grappled with the challenge f hw t price mbile telecmmunicatins services. Cell C s recent apprach t market with what n the face f it appears t be a standard pst-paid rate, per secnd billing, whether in r ut f bundle, and fr a range f cntract duratins, has gne sme way t intrducing clarity fr cnsumers f mbile cmmunicatins services. It will be very interesting t watch hw the market reacts. In light f this market activity we thught it was pprtune t revisit ne f the fundatin issues fr any utsurcing r managed services arrangement: hw t ensure yur deal remains cmpetitive in a market where the services in questin are very likely t becme cheaper ver time? The Suth African mbile cmmunicatins industry prvides an excellent example f a market which is nw likely t mve s quickly that unless yur deal is crafted t evlve with the market as it mves, there is a high risk that it will becme uncmpetitive shrtly after the ink is dry n the paper. The speed with which this market is mving amplifies the need fr parties t these agreements t fcus n the rights and bligatins in their cntracts t keep pace with a rapidly changing market landscape. Traditinal Benchmarking Benchmarking is the mst typical mechanism included in utsurcing and managed services cntracts. It is intended t give the custmer the cmfrt f knwing it has enfrceable rights t ensure that the supplier s value prpsitin remains cmpetitive. Benchmarking can be effective fr large deals with a lng term and fr services that can easily be cmpared t a sample f the same r similar services within the relevant market. Hwever, if any f these elements are nt present, fr example if the slutin n a particular deal is extremely bespke t the custmer, it is ne f a handful f deals in the relevant territry r vlumes are unusually large r small, it can be very difficult t run a meaningful benchmarking exercise. A full benchmarking can als be cumbersme and expensive and as such is ften nt apprpriate fr a market where technlgy and pricing is evlving very quickly. In rder t try and ensure yur benchmarking prvisin is practically enfrceable, be careful f the pitfalls that are discussed in each f the fllwing key elements t any benchmarking prvisin:

2 What D Yu Benchmark? Mst benchmarking clauses will allw the custmer t cmpare the price f the services t what is available in the market and sme will als allw the benchmarking f service perfrmance. Custmers shuld make sure they are entitled t benchmark the price fr all r part f the services. It can be easier t cmpare parts f the verall service scpe which are cmmnly available in the market place. Further, having t cmpare the entire service can make it difficult t find a representative sample f deals with the same r similar features acrss the whle f the scpe. Wh Des the Benchmarking and Hw Are They Chsen? Generally a reputable third party benchmarker will be chsen t cnduct the benchmarking but be careful f leaving the identity f the benchmarker up t the parties t agree at a later stage during the cntract. If the parties cannt agree n the benchmarker later the benchmarking clause may, despite including mdel terms, never see the light f day if the parties simply dn t agree n wh will cnduct the benchmarking. If the custmer des nt have a unilateral right t chse the benchmarker, at a minimum yu shuld agree a shrt list f the benchmarkers that bth parties agree t at the utset and which the parties will chse frm if the right t benchmark is ever exercised. Hw Often? Mst suppliers will resist benchmarking in the first 12 mnths f a cntract n the basis that they need t be given the pprtunity t establish the service. In mst large deals this is nt a cncern fr the custmer as the chances f ging back ut t tender s sn after the executin f the cntract are slim. Hwever, this grace perid can be prblematic fr markets that are evlving rapidly which is typical f ICT. If yur deal is being entered int in the cntext f a rapidly changing market, be careful f signing up t a lng grace perid befre the benchmarking rights can be exercised and if yu have t, make sure that there are ther mechanisms in the cntract that prvide yu with prtectin, fr example market testing r mst favured natins prvisins (as discussed belw). Nrmalising the Services Althugh certain services that are typically utsurced are gradually mving alng the spectrum twards cmmdity, it remains unusual fr any tw large utsurcing r managed services deals t be identical. In rder fr the benchmarker t cnduct the benchmarking it will be necessary t nrmalise the services acrss a representative sample f deals. Suppliers prefer t be prescriptive abut: (a) the elements f the deal that will be used by the benchmarker t nrmalise the services and (b) a minimum number f deals that need t be included in the clause fr the sample t be representative. There is a natural tensin in ding this: the mre specific the elements f the deal that are used t nrmalise the services, the fewer deals there will be with each required element and befre lng the benchmarker will be struggling t find enugh deals t meet the prescribed minimum number. The Suth African mbile cmmunicatins market is again a useful example in this cntext. It is rare fr tw peratrs t ffer identical services and cmmercial packages t their custmers. One deal can be cmprised f a certain number f free minutes, reduced rates ff peak, a shrter cntract term, preferential data services and excellent netwrk cverage while anther will ffer fewer free minutes but cheaper ff net calls and a lck in t a lnger cntract perid with a cnnectin incentive bnus. If each f the elements that g t make up a cmmercial ffer frm the peratrs was strictly prescribed as necessary fr a representative sample, and there was als a requirement fr a minimum f six deals in the benchmarking exercise, it will becme impssible fr the benchmarker t find a representative sample. In these circumstances it is imprtant t ensure that the cntract refers t a mre general cmparisn f the cmmercial value prpsitins taken as a whle acrss different suppliers, rather than islating what can be cmpared dwn t narrwly defined and specific elements f each deal.

3 The elements f a deal that are typically used t nrmalise the services include the fllwing: Scpe fr example what equipment, gegraphy, hurs, end users etc. is/are being cvered by the services; Vlume fr example numbers f end users, devices, r servers; Service Levels fr example respnse and reslutin times and availability levels. Client Cnstraints are there unique restraints placed n the supplier by the custmer that are nt present in ther representative deals? Each f the elements abve as well as any thers required by the supplier need t be scrutinised carefully e t ensure that they d nt make it impssible fr benchmarkers t nrmalise the services acrss a minimum number f representative deals. Benchmarking with Teeth The utcme f the benchmarking exercise has t allw the custmer t enfrce a price adjustment n the supplier, r therwise exercise a right t terminate the agreement. If there is n such right and, fr example, merely an agreement t agree what t d at the end f the exercise, there is little pint in cnducting the benchmarking in the first instance. Streamlined Market Testing Althugh a carefully drafted benchmarking clause with meaningful remedies can be used t gd effect fr the right deal, a full benchmarking can be cumbersme and expensive and nt fit fr the purpses f a deal fr services in a rapidly evlving market. This is ne reasn why s few benchmarkings f utsurced r managed services are ever actually carried ut in the ICT market. An alternative that sme custmers smetimes adpt is a shrt frm market testing prcess whereby: The parties agree a set f cmmdity items that are susceptible t market testing because they are standard in the market place. Custmer cnducts a very simple market testing by gathering publicly available pricing infrmatin frm different third party suppliers in the market place. Custmer presents the cllated infrmatin t supplier and if the supplier s price fr the relevant cmmdity item(s) is nt cmpetitive, supplier will have the ptin t, fr example: Adjust supplier s price t cme in line with the market; r Engage the cheaper third party supplier as a subcntractr t perfrm r prvide the cmmdity item(s), and if the supplier des neither f the abve the custmer will have the right t terminate the perfrmance r prvisin f that cmmdity item and engage the relevant third party supplier directly. This mre streamlined prcess will wrk well fr cmparing cmmdity type services r prducts and can be a faster mechanism fr ensuring yur deal remains cmpetitive. Mst Favured Natins Over the last five years ur experience is that the market has shied away frm mst favured custmer r mst favured natins prvisins n the basis that they are t aggressive against suppliers and difficult t enfrce due t the cnfidentiality bligatins suppliers we t all f their custmers.

4 Hwever, the cncept has recently started making smething f a cmeback as custmers grapple with hw they can keep their deals cmpetitive withut embarking n a full benchmarking. Mst favured natins status can affrd a custmer with sme cmfrt that they will at least mve t imprved pricing and services as the supplier mves with the market. Hwever, these clauses remain difficult t enfrce practically as suppliers are legally bund nt t disclse the cmmercially sensitive details f any ne custmer engagement t anther custmer and suppliers are careful t limit the applicatin f this right by narrwly defining the parameters f the scpe, vlumes and service levels within which the custmer can enjy mst favured natins status. Term and Exclusivity Althugh they are mre rare nwadays it ges withut saying that an exclusive deal f 10 t 15 years withut rbust benchmarking rights is nt ging t allw yur deal t be cmpetitive. With the trend t multi-surced envirnments, the lengths f time suppliers are being engaged fr are becming shrter t allw fr greater flexibility t engage a different supplier if the incumbent is uncmpetitive. Custmers are als increasingly aware f the dangers f exclusivity in limiting the ability t engage a different supplier fr sme r all f the relevant services if necessary. Shrter length agreements can be a very effective way t ensure that yu have the flexibility in yur cntracts t take advantage f imprvements in market pricing by mving t mre a cmpetitive supplier upn the expiry f the existing agreement. Hwever, there is inevitably a balance t be struck between this benefit and the price discunts suppliers will ffer fr lnger term engagements. The terminatin fr cnvenience rights in the cntract and any assciated terminatin charges shuld be cnsidered in this cntext. It may be the case that if yu have negtiated favurable terminatin charges and the market has mved aggressively since the cmmencement f the cntract, that even with the cst f the terminatin charge there is still enugh benefit t be derived frm the mre cmpetitive pricing ffered by a successr supplier. In sme industries, including the enterprise mbile cmmunicatins services sectr, successr suppliers are becming increasingly willing t cver the cst f the custmer s terminatin charges under the legacy cntract. Cntinuus Imprvement A cntractual mechanism that can be used t ensure the quality f services remains cmpetitive is the cncept f cntinuus imprvement. Althugh this sunds like an bvius pint that shuld be cvered in all cntracts, it is in fact ntriusly difficult t bind suppliers t an bligatin t cntinuusly imprve the services withut the supplier being able t charge incrementally fr any such imprvement. It is key t ensure that the services and service levels are described and set ut in a way that ensures the custmer will receive what is expected frm the utset. There are then different ptins fr binding the supplier t an bligatin t imprve the services frm that baseline. These include, fr example, autmatic year-n-year increases in service levels and/r autmatic year n-year reductins in price t ensure the supplier is incentivised t drive efficiency int the service. Cnclusin As ever the bjective f keeping yur deal cmpetitive remains ne f the key items in negtiatins n utsurcing deals. In markets such as the mbile cmmunicatins market in Suth Africa, this is brught int even sharper fcus. Thse invlved in the discussins n this pint shuld cnsider carefully the cntract levers available t meet this bjective and the nuances invlved with drafting these prvisins. This white paper is intended t intrduce current and prspective clients t sme f the issues Latham typically handle in utsurcing transactins. It is neither a cmprehensive issues list nr a cmplete discussin f the listed issues, and it shuld nt be treated as legal advice.

5 CONTACT Justin Crnish Alice Marsden Brian Meenagh