Topic: Telecom Surcharges

Guest: Mike Murphy, CEO, NEF

Overview: In today’s marketplace, it’s common practice for service providers to add telecom surcharges to recoup revenues lost due to stiff competition and pricing pressures. In this episode of Telecom Talk, we sit down with NEF CEO Mike Murphy to discuss the interesting evolution of telecom provider surcharges and how enterprises may see more charges than they expect on their invoices.

Next steps: Have questions about the surcharges in your telecom bill? NEF’s team of telecom consultants can review your invoice and answer any questions you have. Contact us today to set up a review.


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0:00:00.0 (Joy) Hi there and welcome to the latest edition of Telecom Talks. I’m talking with Mike Murphy the CEO of NEF today and today’s topic is just really kind of an interesting evolution in network provider surcharges. Mike, welcome!

0:00:18.0 (Mike) Hi Joy, how are you?

0:00:20.2 (Joy) I’m doing great, doing great. Well let’s just get right into it because this is a really fascinating topic. I think that it may not have a lot of visibility and I think that you can shed some light on the topic. Maybe a great place to start is with an overview of what the Enterprise should see on an invoice.

0:00:38.3 (Mike) You know invoices, over the course of time, in many cases have gotten easier to read. But there are still plenty of providers that seem to make them a bit more confusing. In general, what you are going to see is a monthly recurring charge (MRC) and that’s the amount of money you pay for the service every month. And then there is usually, on the first bill, you will see a non-recurring charge (NRC) which is usually your set-up fee and sometimes you’ll see a probated charge, which may be a portion of a month because every carrier has a different billing cycle. So you may have a different component that is just a portion of the month.

0:01:19.0 (Joy) So in addition to what they would expect to see – right – the things that were heavily talked about and negotiated during their sales cycle, what in addition to those MRC and NRC charges will they see?

0:01:31.7 (Mike) They are also going to see taxes, which are the federal, state and local taxes which are purely a pasture. They are all set by regulatory tariffs and you charge a certain amount of taxes. And then on top of that you usually see for many carriers’ fees and surcharges. And so it gets a little bit vague, and to your point, Joy I think the NRC and MRC is very much discussed in the sales process as the advertised price. It is what everyone seems to focus in on. Taxes are something people seem to accept as a part of life and there is nothing that a carrier or the salesperson or even the Enterprise can do. It’s just a cost of doing business in whatever state or county or country you live in.

0:02:27.5 (Mike) Fees and surcharges are a little bit different because those are usually levied by the provider and they’re not necessarily tariffed or fixed.

0:02:37.9 (Joy) So I guess the obvious question that comes to mind is that it sounds like the Enterprises are surprised the first time they get a bill. They’re seeing these surcharges on there that weren’t necessarily discussed or even disclosed at the time of contract?

0:02:52.3 (Mike) Yes, and many times it is certainly is not something that was discussed in the sales process. When you get your sales order form, it typically does not have an all-in price on it. It does not include the taxes and it does not include fees and surcharges so when you get your first bill sometimes it is a surprise if you haven’t spent some time to really understand what your total bill is going to be. You’ll see fees and surcharges that may sometimes add up to as much as 30% on top of the price you were quoted.

0:03:26.7 (Joy) And how are those surcharges typically calculated?

0:03:31.7 (Mike) That is one of the great mysteries of life! We did an analysis here a couple of months back looking at half a dozen different carriers that we work with on a regular basis and a number of different services that our customers had purchased. We came up with 56 different surcharges, and it’s everything from franchise recovery fees to equipment and usage fees, there are just all of these different names and fees and they all seem to have different price points. When we go back to the vendors and ask, “how did you calculate that?” they say, “that’s just part of the billing system and because you bought service in Chandler, AZ those are the fees that apply.” More often than not the client will think those are surcharges and fees are being levied by the county or city or some government entity but in reality, more often than not, they are being arbitrarily charged by the carrier themselves and it is not a regulated fee structure.

0:04:59.6 (Joy) Then the question becomes what is causing this? Why aren’t the carriers disclosing the price at the time of contract? What is behind these extra fees or surcharges?

0:05:11.6 (Mike) A short explanation would be price compression. The marketplace has become very hyper-sensitive to pricing and in a lot of the services that we see in telecommunications (internet services, IP bandwidth services, etc.) what used to be $8/megabit less than five years ago is now down to $0.65. So it’s all about the published price and the discussion about the price. Enterprises have always been very keen on spending their money wisely. As they always look at the cost, in order to be competitive, you have to price your services at a point where they are going to be in-line with other folks in the marketplace.

0:06:06.7 (Mike) The question becomes how do you get back to making your margins and being profitable? They start to put fees in the back-end and really it is not necessarily a trick it’s just saying, “I’ve got a price and if it costs me $1 to deliver service, and I need to make $1.25 to have a reasonable margin, then how much of that $1.25 am I going to put on the fee front-end (which is the service) and how much am I going to put into surcharges and fees.” So it is kind of a difficult situation for both sides. The Enterprise wants to know what their price is and what they are contracting for and in order for and the service provider, in order to win business, needs to reduce their [advertised] prices.

0:06:54.5 (Joy) Is there an additional issue with, for example, let’s say the Enterprise IT group is the one negotiating the pricing and setting up the contract but then a totally different group at the Enterprise organization actually gets and pays the invoice. Is it possible that there is a disconnect between those two groups? Say the AP group gets the invoice and sees surcharges and pays the bill no problem but the Enterprise IT group has no idea this is even going on. Is that possible?

0:07:32.4 (Mike) It happens all the time! Great observation, Joy. That does happen all the time from larger companies to mid-sized Enterprises. Those are definitely two different functions. However, we do have some larger clients where the IT department is responsible for signing off on all the bills that get paid. And then you get into the issue of having the time in the day to review every line item on a 15 page bill to see if there are surcharges and fees.

0:08:10.1 (Mike) So we work with our clients on a very regular basis to audit bills, mostly data services, but also looking at surcharges and fees and asking, “why does this applied in this instance? Is it appropriate?” and, “is this in the contract?” And like I said, sometimes there is 20-30% uplift in surcharges and fees.

0:08:33.5 (Joy) It sounds like in some cases this just isn’t a trivial amount and that it does really start to add up over time.

0:08:40.3 (Mike) You know, on the front-end of the process there is a lot of discussion around the monthly recurring charge, the non-recurring charge and the length of the term. [To solve this] we start to introduce the idea of an all-in bill – what is my total bill going to look like when I get it and we get that in writing so that later on when the bill shows up with 20% uplift with fees and surcharges we go back to the carrier very quickly to argue that the charges were not quoted and that they cannot be applied. And we make sure that our client pays the rate that they were quoted.

0:09:20.4 (Joy) Obviously that is a benefit for you, having worked hundreds of times on these processes but what advice would you give to individual Enterprise like C-groups that may not have this experience with what is happening with surcharges? What other advice would you give them besides the written confirmation?

0:09:47.5 (Mike) Ask the question before you get the written portion of the contract. Say something like, “Okay you’ve given me a monthly recurring charge. Now I want to know what the all-in price is, including taxes and fees.” Most folks don’t focus on that – it is just something that doesn’t come up. To be fair, I think it’s also been in our experience (since we’ve reviewed bills and different things) based on what’s happened in the market in the last several years, the idea of fees and surcharges has escalated quite a bit. It’s become more of a problem as of late than it was five years ago.

0:10:31.8 (Joy) It sounds like the best advice is to ask questions and get clarity up-front as to what taxes [and surcharges] should look like in a reasonable range. What else can they do once they get an estimate back? Can they do anything about that if they see the fees tacked on at that point?

0:10:54.7 (Mike) Yeah, you certainly can. You want to dig in and ask questions about what is that and what is it for. Then you want to make a purchasing decision based on having all of the information not just the information they showed you on the front-end of the process. Again there is variability – lots of variability – between carriers in terms of fees and surcharges.

0:11:18.8 (Mike) If it becomes competitive when you have all of the numbers from a couple of carriers then you can go back and say, “Based on the fact that you are adding $1,000 per month transport connection fee (and nobody really knows exactly what that is) your price is no longer competitive.” Then one of two things will happen: either the carrier will say that all of that stuff automatically gets applied by the billing system and won’t take it out or they will reduce the MRC to off-set that. You may have to play around with it a bit and ask that they lower the monthly recurring charge since that is the portion that is negotiated.

0:12:09.3 (Mike) What I would recommend is that if a carrier is saying they are going to take fees out, make sure that they are able to do that within their billing system. Otherwise what will happen is that every month you will be fighting over about the same thing.

0:12:26.8 (Joy) That’s obviously not an area where an Enterprise IT group wants to be spending its time – or anyone really who is fighting over line-items in a bill.

0:12:35.5 (Mike) Correct.

0:12:37.3 (Joy) This has been really helpful and I know that your team has done the study of telecom bills and that will be available online. You can visit www.nefiber.com and check the blog for the results of NEF’s telecom invoice audit. Mike, thanks a lot for your time today. I look forward to our next conversation.

0:13:00.7 (Mike) It has been a pleasure, thanks Joy.
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