Managing Maintenance and Support CostsCutting operating expenses by analyzing and negotiating service contracts

By Ron Lev and Vikrant Viniak

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Few business organizations of any size can survive for long without reliable IT hardware and software. And no organizations are more dependent on their IT infrastructures – in particular their network hardware and software – than global communications network operators and multiservice operators (MSOs) such as cable operators and telecommunications companies. Simply put, without the routers, switches, optical transport systems, and other network equipment in their IT infrastructures, these businesses could not deliver revenue-generating services at a level that meets their customers’ expectations. Given the strategic importance of this equipment, it is no surprise that investment in networking hardware and software claims a large share of the capital budgets at these companies, and the contracts to maintain and service the network infrastructure represent a significant operating expense. For many MSOs, these contracts offer a significant opportunity to realize substantial cost savings – an opportunity all too often overlooked.

Most MSOs use strategic procurement (multiyear, cost-advantaged agreements with key suppliers) to manage, and in many cases reduce, their capital spending on network equipment. Far fewer, however, view the contracts for servicing and maintaining that equipment through a strategic lens. Accenture believes that doing so can yield significant reductions in operating expenses while at the same time achieving a tighter alignment between business strategy and the service and maintenance levels necessary to support the business. What’s more, recent developments in the network-equipment marketplace offer an exceptional opportunity to restructure service and maintenance agreements on terms far more favorable to equipment purchasers than their current agreements afford them. While negotiations alone can generate savings of 5 percent to 10 percent on average, MSOs and other communications-intensive businesses

can realize far greater operating-expense reductions – up to 90 percent – if they prepare for negotiations by analyzing their existing servicing deals and using the data derived to determine the optimal level and cost of support across the entire range of their installed base.

This Accenture Point of View presents a framework for analyzing network-equipment service and maintenance contracts and using the data generated by the analysis as the basis for negotiating new contract terms. The process can be lengthy and challenging, but the potential payoff is sizable. The analysis clarifies the relationship between capital expenditures on network equipment and the operating cost of maintaining and servicing it. It also opens a path toward striking a better balance between the cost of maintenance and service contracts and the value they deliver.

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Analysis Reveals the True Value of Services

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Our experience performing this analysis with clients has revealed that the cost of some maintenance agreements was far greater than the value of the service they received. One client was paying a vendor $1.7 million annually (aggregated across several contracts) to ensure software and hardware support and immediate replacement of failed switches. The analysis revealed that the cost per activity – that is, the cost of a service incident such as a support call, hardware repair, or software patch or release – was extremely high, compared with the value received. This finding provided powerful leverage that enabled the MSO to negotiate new service agreements that sharply reduced the cost per incident. Figure 1, below, breaks down the various activities provided in 1 year (cost $1.7M).

The changing conditions in the network-equipment market offer MSOs an additional negotiating lever to reduce both capital and operating expenditures. Vendors of network hardware and software are consolidating rapidly, resulting in a greater diversity of products

offered by a single vendor and creating opportunities to reduce support costs. These developments create an opportunity for network operators to:

•Concentratecapitalspendwithkeyapproved vendors, especially when they offer multiple product categories. As a vendor’s share of the MSO’s procurement budget increases, so does the vendor’s incentive to improve the terms of its service contracts.

•Negotiateanumbrellaserviceagreement with a single vendor that supplies multiple products in the operator’s installed base, especially when products formerly on multiple platforms are consolidated onto a single platform.

•Renegotiateservicecontractswhenan incumbent vendor acquires another incumbent vendor. The acquirer is usually the larger of the two vendors and can leverage economies of scale to deliver more appropriate service levels at lower cost than those originally negotiated with the acquired entity.

# of Onsite RMAs

#ofNBDDepotRMAs Priorities #ofTACCalls

# of Software Releases

# of Software Patches Deployed

8 10

P1 14

4 6P2 28

P3 4

P4 0

Figure 1: Value analysis reveals the cost per service is extremely high, compared with the value received.

One client was paying a vendor $1.7 million annually (aggregated across several contracts) to ensure software and hardware support and immediate replacement of failed switches.

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Performing the Analysis

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The purpose of the service and maintenance analysis is to create a detailed picture of the true cost of a network operator’s support agreements. Once an operator has determined that cost, it can devise a support mix that aligns the strategic importance of item in its installed base with the level and cost of support it requires. Metrics generated from the data captured in the analysis drive the negotiations necessary to achieve the right level of support at the right cost. Figure 2 depicts the overall flow of the contract analysis and negotiation process.

Let’s now take a closer look at each part of the analysis that generates the data used in negotiations.

CategorizingthesupportspendThe purpose of this exercise is to break down service and maintenance spending by vendor, type of equipment, depreciated cost, service area, operating entity, and so

on. For each item on the equipment roster, the analysis should also include details on its related service level agreement (SLA), the contract that spells out the terms, conditions, and cost of the services that the vendor will provide. Figure 3 provides a glossary of the most common types of service and maintenance contracts and rate structures.

Verifying support-charge calculationsAfter gathering and validating data on service levels and maintenance spending, the next step is to verify each vendor’s basis for calculating support charges for each category of equipment. Most vendors can supply at least one or two years’ worth of detailed support-chargequotes.Becausemanysupportcontracts call for calculating service charges as a percentage of net price, the network operator should verify that

the value the vendor assigns to each product agrees with the value assigned by the network operator. If the vendor is supplying equipment pursuant to a recently negotiated strategic procurement agreement, the MSO can usually demand that the embedded base cost be adjusted to the standard or lowest price paid, rather than higher price charged before the sourcing agreement took effect. One client recently slashed about $1 million from support costs simply by reducing the baseline value of a single supplier’s equipment by roughly 25 percent.

Tailoring the support mixNowcomesthecrucialstepofaligningservice levels to business strategy. A detailed comparison of support costs against value received will likely show that some hardware and software can be supported at lower service levels without significantly impacting their reliability or compromising the network operator’s

Figure 3: Common types of service and maintenance contracts and rate structures - Service Level Agreement Overview

Level DescriptionRate Per Service Total Rate

Hardware (HW)&NetAppliance Products*

HW Warranty

Replacement Maintenance Agreement (RMA)

30 day HW fix & return service0%-3%

3%-15%

NexrBusinessDay(NBD)RMA Nextbusinessdayreturn* 1.5%-5%4-hour RMA 4 hour warranty return* 1.5%-5%

Software (SW)

Warranty

W only Newproductreleasesandfeaturesastheyaremadeavailable

Patches and workarounds to correct problems 2%-13%9x5 technical support Basiccoverageduringworkinghours24x7x365 support On-call support 24x7x365On-Site Dedicatedon-siteresources Time and

MaterialsTime and Materials

Software-Only

Products

SW Warranty

and Support

Warranty only Newproductreleasesandproductimprovementsasthey are made available

Patches and workarounds to correct problems

Telephone assistance

Support on a per license rate

8%-25% 8%-25%

9x5 technical support24x7x365 supportOn-Site

*NetAppliancereferstoallproductswhicharebasedongenerichardwarebutstillpartofthenetworksuchasVideoOnDemand,VoIPetc.

Figure 2: The value analysis process

1. Data Verification(Inventory, Budget)

1. Gather relevant contracts information into one place to identify likely targets for negotiation2. Relevant information includes: - Support cost and terms - Expiration - Embedded base - Future plans

1. Gather value based metrics based on total number of RMAs, calls & Software fixes/upgrades2. Discuss Service level requirements, sparing capabilities, etc...with key stakeholders3. Decide on next steps for vendors

1. Complete value analysis2. Create talking points for vendor discussions3. Develop target asks4. Communicate plan and get approval from stakeholders

1. Communicate value based message to vendor2. Send asks ahead of conversation to allow time for response and reduce cycle time3. Determine strategic and operational risks of reducing or eliminating support

3. Value Based Analysis& Negotiation Strategy

4. Fact Based VendorNegotiation

2. Operational StakeholdersEngagement

Key Steps

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strategicobjectives.Bythesametoken,however, some equipment may be so strategically important that it requires a more advanced – and therefore more costly – service level. Even so, there may be other ways to cut support costs, such as switching to a fee-per-incident pricing model or dropping RMAs for some hardware and keeping spares in inventory instead. Just as no two companies have identical strategies, no two companies will have the same optimal service mix – the point of the analysis is to arrive at the mix that best matches a company’s unique strategy and network architecture.

Figure 4 shows a typical menu of SLA options that operational stakeholders can refer to during internal discussions aimed at determining the optimal support mix, prior to opening negotiations with vendors. As the menu shows, the SLA options will vary according to the equipment type, fault history, and the vendor’s sensitivity to negotiating levers.

Preparing the negotiating dataHaving determined its optimal service mix, including the appropriate methods of calculating support charges, the network operator can prepare for a series of negotiations with vendors to forge the SLAs that will make the mix a reality. Metrics derived from data generated by the support cost analysis will supply most of the critical negotiating points. Most operators find that they gain the most leverage by expressing the value of the support on a “cost per” basis – cost per failure, for example, or cost per help desk call, or cost per on-site repair. These metrics help clarify whether the cost of support is in line with its value and whether a higher or lower level of support is appropriate.

One client recently slashed about $1 million from support costs simply by reducing the baseline value of a single supplier’s equipment by roughly 25 percent.

SupportMixChangeOptions&Guidelines Technical Support Software Support Hardware SupportNochangetoSLA Noleverage,smallersizeor

terms already strongNochangeinterms Nochangeinterms Nochangeinterms

Lower rate SLA Larger vendors who are strategic and little leverage

Rate of X% of embedded base Rate of X% of embedded base Rate of X% of embedded base

Service level change Support levels too high (can be used with others)

Standard technical support at a rate of X% of embedded base

Standard software support at a rate of X% of embedded base

Standard RMA service at a rate of X% of embedded base

Fixed Fee Large, complex vendors with multiple contracts

A flat fee of $XX for yearly technical support issues

A flat fee of $XX for yearly software support issues

A flat rate of $XX for RMA service

Time and materials Vendors where little maintenance is used, but some coverage is needed

Time at a rate of $XX/hr per person

N/A Time at a rate of $XX/hr per person Materials at current contract rates

Pre-paid Vendors with moderate level of support

XX tickets at a cost of $XX with additional tickets costing $XX

N/A N/A

Pre-Paid with carryover Vendors with moderate level of support

XX tickets at a cost of $XX Usused tickets carryover to next year Additional tickets cost $XX

N/A $XX for XX RMAs $XXforXXNBDRMAs

Fixed fee and pay as you go Vendors with higher, unpredictable level of support

$XX flat fee for access to technical support $XX per call

$XX flat fee for access to software upgrades $XX per software major release $XX per software patch

$XX flat fee for access to RMA Service $XX per RMA

Pay as you go Vendors open to model and with stable support levels

$XX per critical call $XX per major call $XX per other call

$XX per major software release $XX per software patch

$XX per RMA $XXperNBDRMA

Pay as you go with incentives for strong performanc

For reliable, strategic vendors, who would be unlikely to sign up for pay as you go model alone

$XX per critical call $XX per major call $XX per other calls $XX performance incentive for less than XX combined critical and major issues

$XX per major software release $XX per software patch

$XX per RMA $XXperNBDRMA $XX performance incentive for less than XX RMAs

Nocoverage Vendors where sparing can be used or support not needed

Per tariff/posted rates May or may not be available Self-sparing

Figure 4: Typical menu of SLA options

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NegotiatingStrategy: Timing is (almost) Everything

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The timing of negotiations can have a significant impact on their outcome. While talks should ideally begin fairly close to the expiration date of a current support agreement, operators should be prepared for delays and multiple rounds, as vendors tend to work cross-functionally and need time to coordinate their sales, finance, service, and legal teams. Whenever possible, network operators should time support-contract talks with a vendor to coincide with planned equipment purchases from the same vendor. One Accenture client, an MSO, recently negotiated a suite of support contracts with a vendor that was the frontrunner to become the favored supplier of a network solution. That deal had not been concluded, and the door was open for another vendor to step in if the MSO and the prospective favored supplier failed to come to terms. With strong incentives to strengthen its overall relationship with the MSO, the supplier agreed to several support agreements on terms highly favorable to the MSO, reducing its support charges (expressed as a percentage of the installed base) by 40 percent.

In another recent case, Accenture worked with an MSO to conclude strategic procurement agreements with a several key vendors and advise on reducing support costs without compromising reliability. That meant negotiating new SLAs with more than a dozen vendors. Figure 5 illustrates how the MSO prepared for negotiations by arranging vendors into tiers and crafting negotiating strategies for each tier.

The MSO then scheduled negotiations to begin at staggered, two-week intervals, beginning with the strategic vendors, to allow time for any necessary additional analysis and to enable the MSO to use the outcomes of early negotiations as leverage with lower-priority vendors. The MSO began negotiations with a strategic partner that charged support asapercentageofnetprice.Becausethe vendor supplied a large share of the installed base and could expect the MSO’s purchases to escalate over time, it agreed after little negotiation to value its equipment at the lowest price paid within a specified time frame. That vendor’s baseline valuation model became the standard expected

of all other strategic vendors. The MSO also modified the pricing model for its strategic partners, negotiating a switch to a flat fee based on incremental spending. Bystabilizingsupportlevelsasthevalueof the installed base grew, the MSO cut its effective support rate – the cost of support expressed as a percentage of the aggregate net price of each vendor’s equipment in the installed base – to 3 percent from more than 5 percent.

Suchoutcomesaretypical.Butthenegotiations that produce more favorable SLAs are almost always lengthy and involve constant reevaluation and analysis in response to vendors’ counterproposals. Recognizing that most vendors typically offer counterproposals that deliver less than desired, prepared operators will go into each successive negotiating round armed with data that supplies the leverage needed to reach a better outcome. We have found that a rigorous support-cost analysis invariably yields data that tells a compelling story – a story that companies with large investments in network infrastructure can use to create a permanent operating-cost advantage.

Type* Description SavingsStrategicContracts(>$XXmm)

Negotiationstrategy•Usuallyrequiresinvolvementofseniorleadership,asvendorsinthiscategoryarelong-termstrategicpartners

that have impact on many aspects of the business•Mostvendorsinthiscategorysupply3%-6%ofembeddedbase-spendreductioncaninvolve: - self sparing strategy, SLA reduction and internal capability building

3-12%

>$1MM •Focusfirstoncontractswhereleverageexists,suchasdealswithvendorscompetingforupcomingcapitalexpenditures or vendors whose current contracts are near expiration

•Usevalue-basedaskswheneverpossible,SLAexaminationwithinternalcontractowners•Savingspotentialcanbehigh:manycontractsareon“autopilot”andanalysisshowstheydeliverlimited

value at high cost

8-20%

>$100K •Discusswithoperationalownerswhichvendorsaretopnegotiationpriorities•Determineimplicationsofsignificantlycurtailingoreliminatingsupport•AskvendorsforSLAsthatreflectvalueofserviceprovided

5-15%

Long Tail <$100K •Decideduringreviewwhethertonegotiate,sendboilerplateletterorleaveasis•Operationsownersresponsiblefornegotiations•Usuallynotmuchleverageexixtswithvendor,soservicelevelreductionsoreliminatingsupportareoften

only way to reduce spend

3-12%

Figure 5: Example of arranging vendors into tiers and crafting negotiating strategies for each tier.

*Netcostofinstalledbase

About the AuthorsRon Lev is a senior manager in Accenture’s Technology consulting practice. He has an extensive background in network and video equipment sales to the MSO market and is part of the AVS offering team. Since joining Accenture, Ron has taken a lead role in several strategic sourcing and procurement engagements within the MSO client space and acted as a subject matter expert on others.

Vikrant Viniak is a senior manager in Accenture’s Operations consulting practice. He has an extensive background in leading supply chain transformations and driving the change that stems from these initiatives. Vikrant is also keymemberoftheValueBasedDealscommunity of practice and has actively led and participated in several VBDinitiativesatAccenture.

About Accenture ManagementConsulting,OperationsAccenture is a leading provider of management consulting services worldwide. Drawingontheextensiveexperienceofits16,000 management consultants globally, AccentureManagementConsultingworkswith companies and governments to achieve high performance by combining broad and deep industry knowledge with functional capabilities to provide servicesinStrategy,Analytics,CustomerRelationship Management, Finance and Enterprise Performance, Operations, Risk Management, Sustainability, and Talent and Organization. Accenture Operations consulting services help clients develop more dynamic, innovative and high performing supply chain and service operations capabilities to enable rapid response to changing customer demands and market opportunities.

About AccentureAccenture is a global management consulting, technology services and outsourcing company, with more than 246,000 people serving clients in more than120countries.Combiningunparalleledexperience, comprehensive capabilities across all industries and business functions, and extensive research on the world’s most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. The company generated net revenues of US$25.5 billion for the fiscal year ended Aug. 31, 2011. Its home page is www.accenture.com.

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