Buying Telecommunications? Avoid long-term agreements

Dramatic changes expected in the South African telephony market over the next few years mean buyers of telephony and IT services (fixed line and mobile) should avoid long-term agreements with their current service provider(s), keep on top of market offerings and understand the changing need of the businesses they serve, says Purchasing Index’s (PI) Alan Low in this month’s SmartProcurement.

The SA cell phone industry has seen explosive growth in the last 5 years and now has some 29 million subscribers. A price war has broken out between the three cell phone service providers, pushing pay-as-you-go rates as low as 69c per minute. The growth is now seen in data, although prices for data bundles are dropping quickly.

The reduction in cell call costs has put a squeeze on profitability, affecting the middlemen. Nashua Mobile has ‘thrown in the towel’ and is closing its operations. Others are expected to follow, as the return on investment continues to decline. Will Cell C seek to offer services to corporate SA?

In May Vodacom put in a bid to buy Neotel from Tata Communications. If the deal goes through, there will be two operators offering convergence between landline and cellular (Telkom and Neotel). Telkom has bid to buy Business Connexion, an IT company with a substantial client base. The pace of consolidation will, in the view of Paul Booth – a telco analyst, increase as companies seek a larger base and integration with IT services.

It is also being suggested that a large overseas telco may make an offer for Cell C.

Neotel, along with other telecom and IT companies, has been laying fibre optic cable between major cities and in many of the main city suburbs with the plan of being able to offer some of the fastest communication speeds in the world. Telkom is also in the middle of rolling out new technology that will greatly enhance its ADSL speeds. This will affect small businesses as well as large; in fact, a Parkview residents’ association has recently put out a tender for an operator to install fibre optic cable directly into their houses.

Furthermore, there is a small but growing number of users worldwide who are seeking a ‘retro’ cell phone for calls and SMSs only, while using tablets or PCs for emails, apps and document management. Remember the phones that fitted into a pocket and the battery lasted upwards of a week?

What does this mean for organisations that buy cell services for their staff? There are a number of scenarios that SA organisations can adopt.

The first is to continue as they do currently – taking the current offerings from cell phone providers and negotiating a discount on call charges and phones. Apart from the complexities of the packages offered this can lead to a lot of administration and extra costs (e.g. if contracts are not maintained properly, etc.).

The other options include:
• Negotiating a discount off (preferred) handsets for staff and purchase of bundles of time (on a pay-as-you-go basis?). This could materially reduce the amount of admin work and make the staff accountable for their phones.
• Look at negotiating convergence arrangements with a single service provider for land and cell services, with the benefit of a single transportable handset for all calls, etc.
• Putting out an annual RFI to service providers to see how their offerings are changing, and then making a decision.

Other options will come to market as current providers compete with greater agility and (IT?) companies that have not traditionally been involved in telephony begin play a role.

PI offers benchmarking services aimed at comparing the services, processes and costs incurred by corporate SA in buying goods and service, including cell phones. If you would like to understand more please contact Alan Low on alan@pibenchmark.co.za.