By negotiating an agreement with a new telecom supplier, the strategic sourcing operation at The Principal Financial Group reduced its voice services costs by more than $7 million.

Voice services is one of the company's more critical buys. Headquartered in Des Moines, Iowa, The Principal Financial Group provides its customers globally with financial products and services—retirement and investment services, health and life insurance and mortgage banking. (In fact, it provides administrative services to more 401k plans than any other provider in the U.S.) All told, the company serves more than 11 million customers from more than 250 locations including offices in Asia, Australia, Europe, Latin America and the U.S.

Before strategic sourcing's involvement in the voice services buy, Principal had been doing business with its incumbent supplier for 22 years.

So, when Brad Simpson, assistant director, strategic sourcing, joined the operation nearly three years ago, one of the first issues he faced were complaints about service levels of the incumbent supplier. From past experience, he saw the voice services purchase as an opportunity to help reduce the company's costs.

Simpson, whose background includes work experience in IT procurement with Wells Fargo (formerly Norwest), is responsible for Principal's technology purchases. Another two assistant directors are responsible for nontechnology purchases and asset management (technology and software license compliance). The assistant directors report to Randy Roth, director, strategic sourcing [PUR: Dec. 22, '00; p. 48].

Principal spends about $15 million annually on domestic and international voice and data services, with voice making up the bulk of the buy. It includes domestic voice, domestic data, international voice, international data and remote dial-in. The annual spend figure does not include local service.

When a customer telephones Principal using its 800 number he or she needs to be able to speak with anyone anywhere within the company. It didn't used to be that way. Before, a group customer would directly call the group operation, a pension customer would call pension, and life insurance would call life insurance. Now, Simpson says, the phone call is seamless. So, if a customer calls to check the balance of his or her 401k and then needs to speak with someone about a bank account at the Principal Bank, the call is transferred directly, which is relatively easy if the calls are to different offices in the same building in Des Moines. An internal circuit transfers the call.

An incoming 800 number call to the Des Moines office transferred to, say, the pension office in Waterloo, Iowa, is more complex. For security reasons, Principal keeps the call on a private line. From a customer perspective, he or she is unaware of the difference. From a billing perspective, it's more advantageous to Principal economically.

Unique to the company's telecom buy are features in voice service (i.e., voice recognition, data input, and use of a sonnet ring which provides call stability as well as economic benefits).

Undertaking the voice services purchase, Simpson first needed commitment from Principal's voice services department. "They had to be serious about my taking this on. If I were to negotiate a truly better deal, the company would have to be willing to make the switch to another supplier."

So, he conducted a study on the costs and determined that it would be less than $1 million to switch suppliers. Then, he put together a cross-functional team of representatives composed of voice services and data network personnel (strategic sourcing's internal customers) to determine if savings resulting from such a switch would deliver a decent return on the investment.

Simpson negotiated an agreement with a supplier other than the incumbent (in the process he turned to voice services and data networking for help with technical issues) and helped to reduce costs $5.7 million. His team selected the supplier based on its ability to meet the company's voice service requirements. "While there were a few bumps along the way (i.e., training), the agreement was a huge success for us," he says.

There's more. One of the terms Simpson wrote into the agreement calls for an annual rate review. "This gives us ability to review the rates we receive and if we think the market is bearing better rates we ask for a decrease. The supplier has the opportunity to disagree. Then, we renegotiate." Recently, he did just that, adding another $1.8 million in real cost savings (not avoidance) to the company's bottom line.

Other benefits to Principal of the renegotiated agreement include improved service levels.

When the telecom strategic sourcing team initially conducted its request for proposal (RFP), it didn't evaluate suppliers simply on price. "You hear this over and over, but it truly is a total value picture for us," says Simpson. "We expect the supplier to be competitive on price and to differentiate itself through its service capability."

He measures supplier service performance in several areas: network downtime (outages), billing accuracy, service from the account team, provisioning (from initial telephone call placed to supplier to service installment). He also has written remedies into the company's agreement. "The supplier has SLAs (service level agreements) to meet: 99.9% uptime, maximum 30 days for provisioning. I tell all our telecom suppliers that I don't want to have to go back and read the agreement. I don't want suppliers to sell themselves short, but to negotiate an agreement they can live with. I want to know what they can really do, and then set a stretch goal they can continue to improve on."

The reward system for telecom supplier performance is equally as simple. "We tell the supplier that the incumbent always is the first to bid on additional new or expanding business, giving the supplier the 'right of refusal.'"

To achieve similar savings, Simpson recommends sourcing operations first hire a telecom consulting firm to conduct research on tariffs (published telecom service rates). He selected Recovered Capital Corp. of Ft. Walton Beach, Fla. "It's challenging, to say the least, trying to make sense of MCI's or AT&T's tariffs. There isn't one rate for all calls. For instance, there are rates for dedicated to dedicated, dedicated to switch, and switch to dedicated calls. An expert can tell immediately if the rates you've negotiated are good."

While a tariff doesn't publicly identify a company and the rates its pays per se, it does list characteristics of company (such as size), which can be easily compared. "If your company meets similar conditions, you can use the rates as ammunition in negotiations."

Also, he suggests negotiating an agreement that's short (with provisions to renew) and has more flexibility. Take, for example, annual commitments. "Our commitments were so high, our hands were tied. Say we are spending $10 million a year on voice services with a supplier, and our minimum annual commitment is $8 million. At the end of the year, the supplier can come back and say he wants to raise that figure to $9 million and, in exchange, will lower our rates 10%. The catch is that if or when your service degrades you still have to spend that $9 million with the supplier. We lowered our commitments tremendously, and are not restricted by our agreement. Our decisions are business-based. So, say one division of the company asks strategic sourcing to evaluate suppliers for audio and video services. The incumbent supplier will come to the negotiating table with its best offer because it knows we are not committed."