Getting Control of Spending on Wireless

October, 2005

Expenses related to the use of cell phones and other wireless devices, such as the Blackberry, continue to increase for organizations. This article reviews how a rigorous strategic sourcing approach that analyzes internal needs and market drivers can yield a number of opportunities for enterprises to reduce total cost of ownership related to wireless spending.

Industry Background
The use of cellular phones and wireless email devices has grown tremendously in the past five years. By the end of 2005, it is estimated that over 65% of Americans will own a cell phone. As competition has increased and technology has advanced at breakneck speeds, the industry itself has undergone significant change. Based on the latest proposed mergers, there will be only four national carriers: AT&T/Cingular, Nextel/Sprint, Verizon, and TMobile.

This increased use and intense competition has led to significant benefits for consumers. Minutes of usage have increased steadily over the past five years while prices have fallen. In the past two years, however, growth in the consumer segment for the industry has begun to slow. The consumer market has nearly reached the saturation point.

Growth in the enterprise (business) segment, at the same time, remains strong. Enterprise spending on wireless has grown significantly, driven by increased adoption of cellular devices within enterprises and significant increases in data as well as voice usage. As the consumer segment slows, enterprise customers represent a larger and more profitable growth segment for cellular providers.

Enterprise Spending on Wireless
For many enterprises, cell phones, Blackberrys, and other wireless-enabled PDAs are standard equipment for many workers. It is estimated that enterprise customers will spend over $50 billion on cellular service by the end of 2005. However, for many enterprises, spending has tended to spiral out of control. Typically, there is little control, maintenance, or audit of wireless spending. Enterprises allow users to select carriers and plans with little or no oversight. Censeo Consulting Group estimates the  average cellular overspending at most enterprises range from 5% to 50%.

As enterprise spending on wireless has grown, so has the need for enterprise management and control over wireless spending. For many enterprises, wireless spending has evolved rather than grown in a planned fashion. Subsequently, most companies don’t have adequate visibility or control of their wireless spending. According to Gartner Group, more than 90% of enterprises have not published or distributed a wireless adoption or usage policy.

At most enterprises, employees are free to choose their phone, service provider, and calling plan. If there is money in the budget and a perceived need, most users are able to execute a purchase. According to Yankee Group, 48% of U.S. corporations let employees select their service. Once a plan is selected, few enterprises manage individual usage such as corporate mobile-to-mobile calling, peak versus non-peak usage, and personal calls on corporate lines.

The net result of this lack of control is a myriad of contracts with a variety of functions, features, and plans. Many users have plans with too few minutes, resulting in large overage charges. Other users have plans with too many minutes, resulting in unused minutes. Many users never even see their bill or know their usage; bills are often paid centrally with little or no auditing. It is nearly impossible for an organization to manage its spending, let alone monitor usage, plan selection, and compliance.

Market Drivers
As the wireless market has become saturated, competition among providers has intensified. The intense competition has resulted in a decrease of 35% in the cost per minute of wireless service in the past three years. The enterprise market, in particular, has seen intense competition – and for good reason. Enterprise customers generate monthly revenue that is 50% greater than consumer customers – and the gap is growing. Much of the revenue gap is due to the higher usage of data and value-added services in the enterprise market.

The average enterprise customer simply uses his or her phone or wireless PDA more often and for more services than the typical consumer does. Therefore, enterprise customers are attractive to wireless providers. Additionally, competition is no longer about winning new customers as much as it is about taking customers away from competitors. Wireless providers often spend large sums – from $350 to $800 per subscriber – to win new business. These customer aquisition costs include marketing, advertising, and promotional expenses such as free handsets. It will take some providers as long as two years to recoup this investment. Can enterprise customers with large numbers of users help reduce some of these customer acquisition costs?

So, What are the Strategic Sourcing Opportunities?
For the savvy enterprise customer, many opportunities exist to reduce total enterprise-wide spend on wireless services. Achieving these total cost savings will require a coordinated, structured approach to analyzing internal requirements, processes, and policies, as well as external cost drivers and opportunities.

Internal Analysis
In order to generate real savings, an enterprise needs to go beyond a spend analysis and understand existing policies and processes. In addition, it is necessary to get a complete understanding of user needs and requirements before moving forward. Armed with this knowledge, an enterprise can investigate the following opportunities:

  • Implement enterprise pricing plans. Internally benchmark contracts and pricing plans and compare them against each other and against industry benchmarks. Implementing enterprise pricing plans based on user needs and requirements will allow for improved volume-based purchasing, as well as reduced administrative costs. For example, an enterprise pricing plan that includes unlimited mobile-to-mobile minutes may reduce the total number of minutes needed in the average plan by over 50% if most calls are to other employees. Consolidating all users under one supplier and taking advantage of this feature can result in significant savings.
  • Review existing contracts.  Many organizations have multiple contracts with the same suppliers. These contracts often contain widely different pricing, terms, and conditions. Review existing contracts to determine which one has the most favorable terms. Simply consolidating all contracts to the best terms can often save money. Or, take the best terms from each one and negotiate a new contract. At one large agency, over 20 contracts existed for cellular service with one supplier. The prices for the most and least expensive contracts differed by almost 40% for the same calling plan. In addition, it is always a good idea to review contracts versus actual bills to ensure that suppliers are adhering to the pricing, terms, and conditions of the agreement.
  • Practice demand management. Many enterprise users overbuy in terms of the number of minutes, features, and phones that are purchased. Again, understanding user needs and requirements and comparing them to what is being purchased can yield opportunities for savings. For example, a commercial firm found that while almost all of its cell phone users had plans that included unlimited, off-network roaming, only about 10% of its users actually needed that feature.

Market Factors
Understanding the economics and cost drivers of the wireless provider market can yield tremendous savings for the enterprise customer. An enterprise customer, purchasing in a coordinated approach, can impact both its own costs as well as the wireless provider’s costs – resulting in lower pricing.

  • Take advantage of price declines. Given the rapidly changing wireless environment and the drastic reductions in pricing over the past few years, many enterprises have contracts that are simply out of date. In the past three years, per minute charges have dropped on average 35% across all suppliers. If a user signed up for a wireless plan over one year ago and hasn’t re-evaluated it, the pricing is most likely 10% higher than it should be. Pricing and equipment refreshes should be built into any contract to ensure users are receiving the most up-to-date pricing.
  • Negotiate on an enterprise-wide basis. Understanding the economics and cost drivers of wireless providers yields insight into the best opportunities for negotiating on an enterprise-wide basis. There are a number of key cost drivers such as customer acquisition costs (known in the industry as cost per gross addition, or CPGA) and account servicing costs (known as cash cost per user, or CCPU) that enterprises can impact. Identifying opportunities to reduce these costs allows wireless providers to pass the savings along to the users.
  • Realize the value of your enterprise wireless spending. Enterprise customers are valuable to wireless providers due to their expected revenue and usage profile. Enterprise customers, on the whole, produce 50% more revenue than the traditional commercial customer. Enterprise customers tend to use more minutes and more enhanced services such as data and messaging. As a result, enterprise customers produce significantly higher revenue and margins. Enterprise customers can take advantage of this fact to yield further price breaks.

As enterprise spending on wireless services continues to grow, implementing a number of these changes in the short term will lead to better management and lower costs over the long term. By applying a rigorous, analytical and proven approach to wireless, significant savings can be achieved.

October 2005

Article provided by Censeo Consulting Group, Inc.
© 2005 Censeo Consulting Group, Inc.

Censeo is a strategy consulting firm providing management teams the expertise and insight required to drive operational improvements and bottom-line results. The firm has worked with both commercial and government clients to implement strategic sourcing initiatives for wireless services as well as many other products and services.