NetGain Communications
Telecom expense management and network optimization consulting for T1, PRI, MPLS, frame relay, web conferencing, VOIP, and local & long distance services.
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December 1, 2003
Phone+ Magazine
By Khali Henderson
A new type of company has emerged from the telecom bust of 2000. Its services include business continuity planning, traffic analysis, least-cost routing implementation, RFP creation, proposal consolidation, customer service record analysis, bill consolidation, telecom spending management and forecasting, telecom auditing, online telecom inventory management, network design, project coordination of service delivery, online order tracking, supplier selection and management, and ongoing customer support.
While this describes services provided by large professional services firms charging Global 2000 companies high fixed fees and huge hourly rates, this portfolio now is being provided to cost-conscious midmarket clients for low and sometimes no fees by a new breed of telecom consulting firm that derives its revenue from suppliers of network services rather than from its clients.
You may be thinking the model sounds like a traditional telecom agency. Indeed, these consulting firms — let’s call them professional services agencies — are similar to traditional agencies in that they work to achieve recurring revenue streams from service providers by winning network services contracts. What’s different is that their goals are to become clients’ outsourced telecom departments by providing better service more cheaply than they could on their own.
As such, professional services agencies say they typically incur more back-office expenses than traditional agencies as experienced, high-dollar project managers, provisioning managers, network engineers and operations specialists are required to provide the lengthy list of consultative services noted above. (Anecdotally, payroll absorbs about 80 percent of the margin, according to one source.) While there remain some similarities with master agencies, (which also are increasingly taking on backoffice functions for carriers) one notable difference is professional services agencies maintain few or no subagents. They rely largely on employees to deliver consultative services to their clients.
“Our back office systems must do more than off-load functions from the carrier such as order tracking, which we do and the carriers love, but in our model, since we are a professional services company, we must offload functions from the clients as well,” says James Larsen, co-founder and COO for NetGain Communications, one of these self-described “hybrid” agencies. Such client functions might include Web-based telecom inventory management and bill consolidation in the case of multiple vendors or multiple sites. These additional overhead expenses in turn reduce net margins and require professional services agencies to focus on larger accounts. Targeting customers with total telecom spend of $5,000 per month is typical, though it’s not uncommon to win customers spending in excess of $100,000 per month.
Furthermore, Larsen says hybrid firms like his seek out carriers not with the highest commission rates, but with the best install records, seamless turn-ups and high level of customer service. “The reason is that higher gross margins don’t necessarily translate into higher net margins under this new model as the consultant has created and is responsible for implementing the project plan on time and on budget,” he says. “Any hiccups could result in penalties or require more onsite personnel and, in turn, incur more costs. Worse, the client could be lost.”
Where did professional services agencies come from? As carriers downsized or simply went belly-up, they let go of some of their best talent. Many displaced executives landed at traditional agencies that saw the potential benefit of having engineering, provisioning and product specialists on their staffs to win large customers and provide enterprise-grade services.
Total Network Services (TNS) is one example of an agency that has made this transition. J.T. Thorman, a co-founder of 8-year-old Woodstock, Ga., company, says TNS was a successful traditional master agency serving more than 160 active subagents nationwide and more than 4,500 customers. After deciding in 2001 to change its model to a full-service consultancy targeting large businesses, TNS now has less than 35 active subagents. “We converted most of the remaining agents to referral partners,” says Thorne. In addition, TNS added six employees and began providing consulting services directly to customers. “We used to just provide long distance at a low price, but now we are essentially the telecom department for our clients. This is an impossible conversion if you don’t have experienced telecom people on your staff,” he says, noting 35 percent of his company’s revenue now comes from 10 very large clients.
While some laid-off telecom veterans ended up at companies like TNS, others simply started their own consulting firms. After selling CLEC Net2000 Communication in late 2001, Peter Callowhill and Larsen founded NetGain, for example. Either way, they view the revenue model of traditional agencies as a means to deliver services to their clients at reduced cost or no cost. “Our initial strategy was to build a full-service telecom consultancy, and we recognized that in challenging economic times we did not want to charge our clients a lot to have access to our experience,” says Callowhill, who is CEO of NetGain. “We’ve been utilizing the agency model to help eliminate or offset the cost of bringing a high level of service to our clients, and it allows us to compete with the big traditional consulting companies.”
In the midmarket, companies have been outsourcing business functions such as human resources, information technology and telecom equipment maintenance to professional service organizations for years. To capitalize on this trend, these new agencies present themselves as professional services companies and offer services such as network design, business continuity planning, and least-cost routing analysis that in the past were available only to large customers.
Larsen, a veteran of professional services firms, says it is not uncommon for a 1,000-person company to pay a professional services firm $200,000 for network design and business-continuity planning for a headquarters and up to 10 branch offices. In addition to this hefty project fee, there can be ongoing maintenance fees in the neighborhood of $5,000 per month. Both are on top of any network service costs from service providers.
Joe Meehan, director of administration for the National Right to Work Committee and a customer of a professional services agency and its supplier United Carrier Networks, agrees. “We’re getting a tremendous value. I could never afford to have support staff providing these services, and for a cost conscious nonprofit organization, traditional consultancies are out of reach,” he says.
Meehan, who is experienced with both traditional agencies and traditional consultancies, says these new firms bridge the gap between the two. “Clients are benefiting from having telecom experts capable of solving complicated telecom problems, designing sophisticated state of the art networks, and providing ongoing project management and client support,” he says. “They offer clients an affordable alternative to either hiring more staff or paying a higher cost telecom consultancy.”
As for client concerns about perceived bias toward the highest commission-paying carriers, these consulting firms dispel them as they do not require the extra percentage points to pay a downline and, choose carriers based on performance criteria first and foremost. Additionally, most include a comprehensive selection of carriers and commonly answer RFPs based on network providers dictated by the client.
These consulting firms also offer benefits to suppliers. Not unlike master agencies, they offload back-office work and generate large volumes of traffic — albeit with fewer but typically larger orders. They also offer some additional perks. According to Chuck Queri, vice president of sales for US LEC, a superregional telecom carrier, “The agents we have with this model have seasoned telecom people on their staffs, and when they recommend US LEC, it is a strong endorsement to the customer. The customers they bring US LEC are typically large, with mission-critical telecom needs. US LEC thrives on serving this kind of customer, so from our perspective, that’s a very good thing.”
Queri also says the extra services these companies provide enhance US LEC’s offerings. “US LEC once won a large client through one these big agencies primarily because we were a part of a larger business continuity plan. Our diverse fiber rings were touching a CO that was important to the overall network design,” he says.
Doug Smith, executive vice president for United Carrier Networks, has a different perspective. “At UCN, we do not have a direct sales force and rely completely on our agents. These consultancies are our best avenue to move up market. Recently, we’ve had one such company bring us a new client that will bill over $250,000 per month in dedicated long distance, and UCN was only part of the solution for this client,” he says. Smith adds the company would not have won the business any other way. “As UCN brings new and more sophisticated products to the market place, we view these consultancies as partners who will embrace and market our new technologies to larger customers.”
Like UCN, other network service providers are beginning to see these firms as partners in addressing mid-to-upper market customers just as they currently view traditional agents as partners in targeting lower-to-middle market accounts. Of course, proof of the model will be economics. If the carriers see consultancies drive loyalty from their clients and turn large customers on to new products, they are more likely to embrace this model long term.
"It seems like I can never get a carrier to do anything until I call NetGain. Then magically, the work gets done."
-Vice President, GlobalPhone Corp.
Falls Church, VA