Value Sourcing Group

Do You Have Business Downturn or Divestiture Contract Language?
Significant business event language (i.e. business downturn, divestiture and network optimization) has been commonplace in most large interstate services carrier contracts for many years.  In the past, it was often a low priority for contract negotiations and many enterprises were never overly concerned with its inclusion at all, using it as a trade off for higher priority issues or just accepting the standard language from the carrier.

With the current state of the economy negatively affecting all enterprises, even standard significant business event language may prove very beneficial in adjusting revenue commitments downward during the mid-term of contracts or in re-negotiations.  Check your current contracts for any language allowing for adjustments to the revenue commitment due to any of the following:

  • Business downturn – with today’s economy many enterprises, unfortunately, will qualify due to easily documented declines in their business (i.e. reduced sales or manufacturing, lost customer accounts, workforce reductions, etc.).
  • Business divestiture – any divisions or subsidiaries purchasing services under the carrier contract divested during the current term of the agreement.
  • Network optimization – any upgrades or replacement of services by other technology from the same carrier which created an overall reduction in spend to the carrier.

If any of these events have occurred, evoke the contract language and seek a reduction in the current contract’s revenue commitment.  Although the enterprise may be on a run rate to exceed the revenue commitment by contract’s end, evoking this option will provide additional cushion and enhance leverage for contract re-negotiation. 
If your current contract does not contain any significant business event language, it is imperative to address this issue as soon as possible.  Re-negotiation of the current contract with the incumbent provider is one option – provided the enterprise is satisfied with the service and support.  With as many as 15 to 18 months remaining in the term, carriers may be willing to recast the contract.  This provides the opportunity to obtain market place pricing (lower rates) and key contractual terms and conditions (significant business event, term commitment verses annual commitments, etc.) by extending the contract for an additional time period.  Based on the individual situation, the carrier may be reluctant to co-operate.  However, once the contract enters the last year of the term, most carriers are more than willing to re-negotiate in order to avoid a fully competitive situation and risk losing the business.  The ideal time to begin contract negotiations is with approximately 12 months remaining.  At this time, the threat of including competition becomes viable if negotiations with the incumbent do not meet the expectations of the enterprise or service and support are issues.  Plus, it allows adequate time to conduct a competitive bid process and, if a new provider is selected, implement the new network services prior to the end of the current contract term but after any revenue commitments have been achieved.

There are many flavors of language for significant business events.  Working with a knowledgeable and experienced contract negotiations consultant is suggested to develop the best strategy and tactics for your enterprise to meet its business goals and objectives.  Accepting standard verses best practice language has a level of on-going risk which the enterprise needs to evaluate and understand.

Obtaining useful and relevant terms on this issue may not be as easy as in the past.  The large carriers have been resistant on the inclusion of best practice significant business language.  Often they do not even include their standard language without prompting from the customer.  Like many contract terms and conditions, the more the carriers are reluctant to provide, the more benefit obtaining the language is to the enterprise.

1. Check current contracts for significant business event language
2. Evoke the language if such terms were included and the enterprise has had an event which qualifies to reduce commitments
3. Obtain or enhance the language through contract negotiations
     a. Less than 18 months remaining with incumbent and no change in carrier desired
     b. Approximately 12 months remaining and carrier change may be considered
4. Use professional consulting assistance to create maximum leverage and results