Be Careful About Service Agreements

I know a non-profit organization (NPO) who wants to save money by switching telephone carriers. They are looking at ways of cutting costs so they concentrated some of their effort on telephony. By reviewing the itemized bills, they calculated they could save up to 25% by switching.

While investigating this, it was determined that this NPO still had one year left on their service agreement. You see, 2 years ago, the NPO signed a three-year service agreement with this telephony provider with a heavy penalty for early termination.

Apparently, 2 years ago, the telephony provider dangled the 10% cost savings to this NPO in order to secure a contract for 3 years.  If you were a telecommunications provider, how motivated would your company be if you could secure a new 3-year contract by offering your clients a 10% discount? Especially in an industry where innovation will continue to drive down provider operational costs. Even if the client decides to terminate the service agreement after 2 years, the provider would recoup a year’s worth of fees. It appears the provider has done their homework including the early termination fee into this new contract.

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Hence, as a NPO, you are essentially stuck for 1 more year of service; otherwise, pay a year’s worth of fees. In retrospect for the NPO, things might now be clearer why your provider was so anxious to renegotiate. They may have framed this negotiation as a win-win although in may become clear the win was in the direction of the provider. At the time of signing this agreement, I’m sure the client (NPO) felt good about renegotiating to save about 10% on their monthly fee. What they didn’t fully consider or anticipate was the high cost of cancelling during the 3 years.

Moving forward, knowing what the client knows, even if their current telephony provider offered a 25% or 40% discount instead of the original 10%, do you think this client will sign another service agreement with this provider? What about recommending this vendor to other NPOs? How will they express their brand if asked about their value proposition with telephony?


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