Many ISP providers, telecom carriers, and data center operators rely on other network provider’s leased circuits to provide end-to-end services to their customers. Many of them habitually match the leased circuit and customer commitment terms without much effort ...<< MORE >>
Numerous Competitive Local Exchange Carriers (CLECs) chase after the wholesale carrier business (e.g., inter-exchange carriers looking for a last mile solution). Many of these wholesale carriers implemented circuit routing tools, which let them automatically select least cost providers. Additionally, wholesale carriers challenge the CLECs to match the lowest cost providers in a region as a condition for negotiating a contract. Such price matching may make it difficult or impossible to stay ...<< MORE >>
Due to various reasons, such as mergers and inheritance of bad management practices, corporate managers are often forced to implement the telecommunications cost reduction strategies without adequate processes, reports, or tools in place to make informed decisions. Additionally, there’s tremendous pressure for these managers to achieve an annual cost savings target. This target forces them to prescribe a harmful cost reduction strategy. Although it’s tempting to swiftly initiate network cost reduction projects to ...<< MORE >>
Has your goal of maximizing short-term task savings in carrier contract negotiations set a condition to lose customers or erode profit margins? Do you have to pursue a costly strategy just to maintain the necessary volume or revenue commitments?
A carrier contract negotiation with a major ILEC/RBOC requires serious attentions because carriers ...<< MORE >>
AT&T (Bell South) Managed Shared Network Services (MSNS) is a service under which customer assigns AT&T the responsibility for facility design and engineering routing of point-to-point circuits. AT&T’s access customer identifies aggregation location(s) in each LATA and the customer must maintain 90% of equivalent DS1s at aggregate location(s) or else pay an annual shortfall penalty.
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Although large telecom carriers can afford to negotiate a nationwide contract with AT&T which may waive DS1 termination liability charges, many network planners and carrier managers often struggle to select the best term plan for ordering circuits. AT&T (Ameritech) access tariff offers several term commitment plans for special access DS1 and DS3 services. Two such plans are the Optional Payment Plan (OPP) and the Discount Commitment Program (DCP). Although each plan brings ...<< MORE >>
A large number of telecom carriers use lease circuits as a last mile solution to reach their customers. Naturally, these telecom carriers try to implement an effective method to manage the leased circuit renewal process. They often identify a list of circuits soon to be expired and evaluate whether or not these circuits should be renewed. If circuits are not renewed, a cost of leased circuits would increase significantly. On the flip side, they ...<< MORE >>
New technology standards, applications, and regulations get introduced every year. Some of them will have a profound impact to a long-range demand of telecommunications services. The MEF, an industry alliance of more than 200 organizations, has recently introduced its Carrier Ethernet (CE) 2.0 standard. This ...<< MORE >>
Eliminating leased network expenses is a core activity of network optimization for many telecommunications carriers when they lease part of their networks from other carriers to provide end-to-end services. To do this effectively, management defines performance measurements and decision criteria to guide network planners. This guidance should drive activities and personnel ultimately responsible for implementing leased network optimization projects.
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A primary reason for merger and acquisition of rival companies in the telecommunications services industry is cost savings. One source for those savings is the elimination of network expenses by integrating both companies’ owned and leased networks. There are a plethora of options to explore to eliminate redundant network costs including:
Since expected network synergy cost savings will be a big factor for determining the transaction price premium, it’s vital that the acquiring company (buyer) set a realistic expectation of realized network synergy cost savings. Although there’s a general process to identify network synergy opportunities, companies often fail to achieve expected savings due to poor planning. In this article we’ll explore some of the potential risks facing would-be buyers and sellers as well as call for additional due diligence into a network synergy identification process to help improve the accuracy of network synergy savings.
Network Synergy Evaluation and Process
There are many approaches to identify network savings during due diligence. A popular method is to group network savings by optimization types or by geographies. Although there are no set rules about how a network synergy process should be performed, here is a high level process:
Although the process that I described is very high level, these exercises will lead to finding a comprehensive network synergy savings. Unfortunately, these steps may not be enough to address other dangers associated with identifying a realistic network synergy savings. A network planner often commits several planning errors including:
Let’s explore each of these risks in more detail.
Consideration 1: Coordination of Multiple Optimization Projects
There are so many ways to achieve synergy savings as I just stated. Some optimization projects aim to eliminate different parts of network costs within a same geographic location. Extra attention is required when dealing with multiple projects. Although these projects may deal with different parts of network costs, they may be inter-dependent of each other. The network planner often fails to understand these key relationships between projects that can result in under-estimating a project timeline while over-estimating projected savings.
For example, the planner initially finds two projects in one market. The first opportunity is to eliminate the leased access expenses by grooming them to the seller’s metro rings. Another opportunity is to consolidate the collocation space where local traffic is aggregated. The planner would like to consolidate the collocation space first, but the buyer needs to acquire additional space to accommodate seller’s equipment as well as higher penalty for eliminating the seller’s collocation space in first year of merger. As a result, the planner must wait to justify the collocation consolidation project. Since the terms under leased circuits are expired and billed at a month-to-month term, the planner would like to initiate the groom project to metro ring as quickly as possible. A main problem is that the planner has to establish an interconnection between two collocation sites to route these circuits back to the buyer’s backbone network since it is not feasible to groom these circuits on to the seller’s backbone due to its current transport route. As a result of additional expenses of establishing the interconnection between buyer and seller, the revised saving is now substantially reduced. Another option is to re-term these circuits until the space consolidation project is feasible, but this decision will also lead to the lower cost savings.
It’s a worthwhile exercise to evaluate the relationships across different network components and how each of these projects will impacts together rather than looking at each project as a separate entity. We need to ask questions such as: Does it make sense to initiate a project “A” first, then to project “B”? If a project sequence is reversed, how is other project impacted? Does it make sense to renew a leased circuit or implement a short-term solution while waiting for another project to launch?
The planner must appropriately adjust the timing of synergy savings as other projects may need to wait until completion of a predecessor project. Additionally, the planner should consider a short-term fix such as renewing a leased circuit while waiting to initiate other inter-dependent projects. Typically, the planner must perform multiple financial analyses to formulate an optimal strategy to maximize synergy savings.
Consideration 2: Network Evolution
There are short- and long-term network integration strategies. Attempting to maximize a short-term network savings can create constraints to implement a long-term network solution. The planner must strike a balance between short- and long-term network decisions to find a right integration strategy leading to a best Net Present Value (NPV). Unfortunately, the planner is tasked to realize savings quickly, the decisions he/she makes may not lead to an optimal NPV over a measured period.
For example, let’s say there is a limited capital funding to integrate the networks in a first year of merger. Where there’s no capital available, the planner decides to establish leased network hubs to consolidate both companies’ leased circuits instead of building a network to completely eliminate leased circuits. The planner is uncertain that the capital will be available in the following year to build the network, thus he/she decides to establish the leased hubs with a five-year term commitment. Because the termination liability charges to eliminate the leased hubs will be substantial as well as a cost of re-grooming will be prohibitive, the network builds will not be approved in the second year of merger as indicated by the lower NPV. The first-year decision to establish the leased hubs with five-year term constrained the combined company to initiate the network build in the second year.
Maybe an optimal solution would be to wait until capital funding is available. Maybe it is better off to establish leased hubs. If a goal is to maximize the NPV over a certain period from the completion of merger, the planner should run multiple “what-if” analyses to understand what series of decisions will lead to the maximum payoff. Let’s not make an optimal short-term decision to hand-cuff any future projects.
Consideration 3: Implementation and Network Scaling
Most people are fundamentally optimistic. It’s no different for estimating network integration savings. Actual results often show lower than expected savings as well longer than expected project timelines. The planner must have realistic expectations of what has to happen as well as realistic timelines to implement these synergy projects. Some issues that can temper optimism are:
The planner should be familiar with potential “soft” issues associated with network integrations such as cultural and communication issues. He/she also needs to ask for key information from the seller such as a network capacity to avoid any future surprises and buyer’s remorse (do not assume that an on-net means they can absorb all of your network demand). In addition, the planner should collect data to help estimate the realistic timelines for completing various project types so that he/she can adjust savings appropriately. For example, a network build can take years due to a highway/bridge/railroad crossing permit or make ready requirement. Don’t wait to collect these valuable data already available to you today.
Consideration 4: Risky Projects
Just as there are risky stocks with above average market returns, a risky optimization project tends to result in a higher potential savings. The planner must be careful when estimating synergy savings. Normalize network savings by risk levels when comparing various network optimization approaches in order to avoid big disappointment after completing these projects.
For example, establishing a metro ring to a customer’s building is a risky project. If a circuit groom to the metro ring is successful, most of current network expenses can be eliminated. Another strategy is to place a node in an Incumbent Local Exchange Carrier’s End Office (ILEC EO) where partial savings can be realized by eliminating mileage charges. Without a risk adjustment, the network build to the customer’s building will lead to a higher net savings, thus decision is to build the metro ring to the customer site. Unfortunately, establishing the metro ring to the customer building can often result in change in a demarcation point. Not all customers are willing to groom a circuit under this scenario especially if no financial incentive was given to them. My previous experiences show only a fraction of customers would participate in a re-groom of circuits when there’s a change in demarcation point, unless “profit” can be shared. Although the optimization project at the ILEC CO will not result in a higher savings per circuit, this kind of groom requires only notifying a customer for the maintenance. All grooms can be done without customer's involvement leading to higher "success" groom rate. As a result, the planner must appropriately adjust savings when comparing optimization projects with different risk characteristics.
Consideration 5: Circuit Life
Although combining network assets would likely result in attracting more customers based on wider network coverage with aggressive pricing, the network synergy savings would come from eliminating existing network expenses by leveraging other company’s network assets. A cash-flow improvement from network cost reduction initiatives over long-term is harder to predict for two reasons.
Network Optimization Benefits Both Sides
Although I discussed various risks for over-estimating the network integration savings up to this point, there are cases where the planner fails to identify additional opportunities due to lack of seller’s perspective.
The planner should strive to understand different perspectives. If the planner’s experiences have been to eliminate the leased access expenses from a perspective of a national network, it’s not obvious to him/her that there are additional network cost savings opportunities that can be realized from a local carrier’s point of view. The planner must ensure the completeness of synergy savings analysis by including opportunities from both buyer and seller’s point of views.
In addition, the planner may be required to combine two companies’ savings opportunities in order to justify a project. Although it’s not always easy to do, the planner should incorporate both sides’ network expenses and demands to perform a necessary synergy analysis if required.
The penalty of incorrectly estimating synergy savings can be high, however the opportunity for maximizing savings are also high. There are few tricks that the planner can incorporate into his/her analysis to improve the accuracy of synergy savings. Although addressing all these issues described in this article can be a daunting task, it’s feasible to adopt few changes to improve the process of estimating network synergy savings. I’ve successfully applied these techniques and principals on similar projects and in one instance helped eliminate $42M in network expenses.
NetStrategy Solutions has extensive experiences in network optimization and integration projects where we can be your great partner to help identify and achieve network synergy opportunities.