Contracting with Carriers vs. Master Agents

Posted: 10/1999

Contracting with Carriers vs. Master Agents
By Keith S. Ferris

Agents of all revenue volume and experience levels are frequently confronted with the
choice between contracts made directly with a carrier/reseller, or those through a master
agent. Carriers and/or resellers may bring to the table equity sharing, direct access to
the source for increased process control and problem solving. Master agents, on the other
hand, often offer subagents equal or stronger commissions, "softer" contracts
and more product choices. There are many issues to consider as you, the agent, select
which of these two supplier types will meet your needs.

Contracts

Contracts are not only the starting point, but also the defining point of your career
as an independent agent. Whether the contract is direct with a carrier or with a master
agent, you need to examine the substance of the agreement closely: Is it one-sided,
rigidly worded or overly demanding? How open to negotiation is the supplier?

If your aim is to negotiate for improved end-user rates, then you should know that for
switched customers this can be hard to come by, and most carriers will have fixed rate
scales and/or tariffs. However, there are a few instances where better rates may be
possible to secure from carriers and master agents who negotiate for you, including
affinity programs, competitive bid situations, win-back opportunities, occasions where you
assume bad debt liabilities, and overall huge volume opportunities on switched or
dedicated access contracts.

Typically, both carrier and master agent contracts ask an agent not to "lie, cheat
or steal." Often, carrier contracts will define the carrier-agent relationship more
narrowly, including stiff penalties for breach of contract. Master agents’ contracts, on
the other hand, are generally "softer," allowing you some flexibility in how you
conduct and secure business. In many cases, the master agent assumes much of the
responsibility and liability, or whenever possible has negotiated some of the barbs out of
its contracts with its carriers. Note that stronger agents, in volume or sheer
persistence, generally will get the best contracts.

In addition, most contracts tie commissions to sales volumes. While commission
percentages offered by carriers and master agents are generally comparable, achieving
those percentages may require a different commitment. For example, to achieve high
commission levels under a carrier contract, you must commit to sell significant volumes
(e.g., $100,000 to $1 million per month). Having already achieved their volume commitments
to their carriers, master agents typically require less pledged revenue from their
subagents.

Certainly it should be noted that the reason a master agent may pay equivalent
commissions to that of a carrier is because they make more generally based on their volume
levels. If you want the highest commissions possible and can deliver on the volume over a
six-month or one-year ramp-up period, then a carrier-direct contract may make sense,
especially if you can attain master agent status on your own. At the same time, such a
commitment may limit your freedom to work with multiple sources, depending on how easily
you’re able to reach the required volume levels.

Another question you should ask concerns the viability and stability of the contract.
Which way is your contract more likely to survive–direct or via master agent? Which way
are you more likely to get paid? The variables that influence these questions are
numerous. To start, ask yourself how much control the carrier or master agent has over its
own destiny. An appealing presentation today does not guarantee that any one company will
make it tomorrow. Also ask what irons these companies have in the fire, or what niche they
control that has long-term revenue potential.

The size of the company is not an automatic determinant for stability. Even the largest
carriers and master agents have been known to cancel their agent contracts, or alter them
in a way that fundamentally changes the business relationship. Ask yourself, and the
prospective service provider, just how important your business will be to them.

One final comment on contracts: Ask yourself how you feel about the company based on
the way it (or its lawyers) presents itself in its contract. Does the contract make you
feel that the company is interested in your success (and in its own)?

Options and Choices

If a contract impedes your chances to control and secure whatever competing options the
future unveils, and diminishes the kinds of choices you will have in your product mix,
then rethink. Understand that by locking yourself into one contract, you may limit your
flexibility in product offerings, as well as your earning potential. An added benefit to
having multiple providers is that you become more of a consultant and less of a
salesperson, toward which customers likely will be more receptive.

To achieve this breadth of product, you can negotiate multiple contracts with various
carriers and/or master agents. To do so may be time- and energy-consuming, but it will
give you the opportunity to close more business. Keep in mind, however, the more contacts
you have, the more difficult it will be to achieve the volume needed to secure adequate
commissions from each provider.

As an alternative to signing a number of contracts with various suppliers, you can sign
a contract with one or two master agents that already represent multiple carrier services.

Comfort Level and Control

Like the customer, you need to consider which alternative will provide the best
representation and needs fulfillment. The trade-off for you in making this decision is
much the same as for the end customer. Are you more comfortable dealing with a carrier
directly or having an independent third-party relationship?

If, as an agent, you’re struggling with the concept of putting your business through a
master agent, you need to ensure that the master agent you are considering can answer all
the same objections you might receive from your own retail customers considering buying
from you, a middleman.

In addition, be sure to do your homework. Check out their record–both on paper
(financials, principals, products, marketing materials) and word-of-mouth. Most carriers
and master agents will have a history known to a number of other agents in the industry.
Ask around.

Also consider how much control you have over your own destiny via direct access to the
carrier or dealing through a middleman. As an agent, you want to solve problems quickly
and get answers immediately. It seems fair to assume that being able to work directly with
the carrier should provide the greatest ability to influence change and get things done
more efficiently. In some cases, this is true. Some carriers have good agent support; some
don’t.

Support ultimately is a function of the underlying quality of the company and the
commitment level it has made to support its agents. Many master agents, for example, have
established a rapport with the supplier and developed "fast lanes" to problem
solving with carriers. While in most cases, subagents are by definition a step away from
the source, some carriers will offer direct support to a master agent’s subagents.

In some cases, a master agent may be one person. On the other hand, not all carriers
devote a team of people to the agent channel. To ascertain a provider’s commitment level,
find out how many administrative people it has to support its agent base. Also, ask how
many agents/accounts each is expected to work. Then, calculate the ratio of
agents/accounts per person to see if it seems reasonable.

Understand also that some larger carriers prefer not to contract with smaller agents
because it is more difficult for them to support hundreds of small agents. Instead, they
prefer to contract with larger agents or master agencies.

Follow Your Instincts

Although choosing a supplier is a business transaction, instincts must play into the
decision. Do you feel alignment with and mutual respect for your service provider? Does
the provider understand the circumstance of the independent sales representative? Does the
provider appreciate your contribution to its success? Does the provider empathize with
your position and task?

Agents would do well to remember that they work for the customer and the
supplier. Similarly, suppliers would do well to remember that agents are their customers.

When considering some of the agent recruiting offers common today, be reminded of the
old adage that is more than appropriate to this industry: Be wary of anything that looks
too good to be true; it probably is.