Ethical Dilemma No. 1: Channel Pricing Conflict

In 2009, the channel community has been discussing the topic of business ethics in its blogs, conferences, forums and backrooms. At the suggestion of master agent Josh Anderson, CEO of Telephony Partners LLC, PHONE+ is tackling the topic in a new and, hopefully, constructive way by presenting “ethical dilemmas” that have happened in the indirect sales channel and seeking comments from suppliers and partners.

What follows is our debut effort featuring comments from Anderson as well as agent Greg Praske, CEO of ARG; and service providers Ron Ireland, president and CFO of TMC Communications, and Michael Fair, vice president, general manager of alternate channels for One Communications Inc.

To add your own comments, look for this article online at www.phoneplusmag.com/you2009. If you have an idea for our next “ethical dilemma,” please contact PHONE+ Editor in Chief Khali Henderson at [email protected].

Ethical Dilemma No. 1

This scenario is comprised of two similar situations, both with the same agent and carrier. While the outcomes were different, both experienced similar chains of events that resulted in real financial impact for all parties involved.

Scenario 1: The agent had a client that wanted to migrate his 60 locations to some type of integrated access solution, and as a result the agent proceeded to secure quotes from a handful of carriers. One carrier in particular stood out from the crowd at 20 percent below its nearest rival. Prior to the signing of the contract, the client was visited by a direct sales rep for the carrier offering more than a 30 percent discount off the rates presented by the agent. The client presented this pricing to the agent and asked if he could match it. He was able to match it and the customer signed a contract through the agent. The difference in price between the agent’s original pricing and the final reduced pricing amounted to approximately $60,000 over the term of the contract, which has since renewed at the same rates.

Scenario 2: The agent had a health care consortium client to whose members he marketed his consulting services. One member, a group with 15 locations, contracted with the agent to install the carrier’s services into one site as a pilot. The services performed well and the savings were significant, so the agent and the client began negotiations for the other 14 sites. Prior to signing the contract, the client was visited by a direct sales rep for the carrier telling the client that he could provide lower pricing than the agent. The subsequent pricing negotiations resulted in the agent lowering the price 10 percent. At that time a second agent called on the client indicating he could secure even lower pricing. Upon hearing this, the first agent exited negotiations. Subsequent pricing exchanges resulted in a final price that was 60 percent lower than the originally quoted price. The client ultimately signed with the direct sales rep. The difference in price between the first agent’s original pricing and the final reduced pricing was approximately $190,000 over the term of the contract.

Mitigating Factors: Direct reps from this carrier have reported that it is possible to view quotes, including customer contact information, that have been produced for agents.

Are either of these scenarios problematic? Why or why not?

Ireland: Yes, it is problematic. The problem is in the fact that carrier’s agent programs and direct sales programs reside on the same service and billing platform. This gives rise to the mitigating factors described above. There is visibility by carrier direct reps into the agent activity. Use of a reseller by an agent prevents end-user contact and billing information from ever being seen by the carrier as the reseller is the carrier’s customer of record and NOT the end-user. That any end-user information needed by the carrier resides, in most cases, on a billing and service system designed for wholesale transactions further removes it from the peering eyes of a carrier direct sales rep.

Praske: Scenario 1 is problematic because it indicates a lack of partnership between the agent and the carrier. This is an all-too-real issue that our team has encountered where a carrier direct rep is approaching our clients – that we brought to the carrier in the first place – attempting to establish a direct relationship with the client independent of the agent. The lack of partnership trains customers to pit us against carrier reps, which is not a good thing for anyone.

Scenario 2 is problematic on a lot of levels. If an agent has a demonstration location installed and is negotiating the remaining sites, the carrier should support the agent and not allow the direct reps to compete for the business. The direct rep should not be allowed to underbid the agent. A second agent shouldn’t be allowed to underbid further. This indicates a total breakdown in partnership. Nobody is respected in the process.

Fair: Yes, these scenarios do periodically come up and are problematic. It is concerning that this carrier allows for competing channels to be aware of quotes and prospect contact information to be shared between channels. Carriers must have “Chinese Walls” established to protect quotes and contact information of prospects. Best practices regarding rules of engagement with regard to these scenarios should allow for competing bids from direct and indirect – as they may offer different proposals or solutions. There should never be a situation where any channel directly underbids a proposed offer from another channel on purpose. The culture of the carrier should not allow for this type of behavior to be tolerated in any way.

Anderson: These scenarios are absolutely problematic. They reaffirm the ever-present problem of competition between the direct and indirect sales channels and illustrate how much everyone suffers when it gets out of control. Every agent has been put in the position of having to compete with a direct carrier salesperson at one point or another, just as many a carrier salesperson has had to deal with competition from the indirect channel. Where carrier policies allow it, these competitive situations are not in and of themselves problematic.

However, when the competition turns into unnecessary price erosion, everyone shares in the resulting problem. In this case, the carrier gave up over $80,000 per year in profits and paid a direct rep a base salary to work deals that were clearly already handled. The agent missed out on probably more than $30,000 per year in commissions. The direct rep in one of the scenarios spent time spinning his wheels when he could have been out generating more suitable prospects and in the other scenario spent time negotiating his commissions down. The customer created ill-will that will produce future costs when he needs customer service. Everyone lost.

What is most problematic is that it is highly unlikely that these are isolated incidents. If it is indeed true that this carrier’s systems allow direct reps to view agent quotes, one must assume that it is not uncommon for a rep close to the end of the month and short on sales to look for low-hanging fruit in agent deals.

How could the agent have acted to achieve a different outcome?

Ireland: The agent should have identified for the customer ways in which his/her services differentiate or add value to the customer over dealing directly with the carrier. Often being able to bring multiple carriers products to the table and preventing the customer from having to deal directly with several different carriers for different needs is a compelling argument. The agent should have provided examples and/or references of other agent clients who have benefitted from the services and support of the agent. The agent should find ways to compete on things other than price. Some examples might include agent’s consulting services, the knowledge and understanding of a wide range of telephony products and providers, and an agent’s professional opinion and advice in steering the customer towards a provider that will provide the best customer experience rather than simply the cheapest price point.

Praske: While in scenario 1 the initial pricing showed a 20 percent competitive advantage, the agent should have known that another 30 percent was available to the customer. That shouldn’t have come to light through a direct rep unless it was something that was truly an extraordinary, one-time exception. If an agent is active in the market, the agent should know what’s possible within a few percentage points.

In scenario 2, as soon as the agent became aware that the direct rep was calling on the client, the agent should have contacted the channel management to address the conflict and take the customer out of the middle. If that was done and the carrier responded appropriately, then the customer would not have to have dealt with three different channels to get their best deal.

Again, if it was possible to lower the pricing 60 percent, the agent should have known it and acted accordingly. An agent should never be surprised by another sales rep – direct or indirect – with pricing 60 to 70 percent on the same carrier. You have to know your market and carriers better than that.

Fair: Most carriers allow for banded pricing and ranges of promoted rates. The opportunity for one channel to offer a better price than another chooses will occur due to this. In scenario 1 it looks like the agent did the proper thing and that the carrier supported this – allow the agent to match the lower price provided by direct and allow both channels to compete on their unique value add to the customer. In this case, the customer chose the partner. It is unfortunate that the carrier had to write down the revenue as a result. In the second scenario I am not clear as to why the original partner would have backed out simply due to these other competing bids being taken by the customer. The original partner should have every right to continue to pursue this deal.

Anderson: In these cases the agent probably had significantly less power to effect a favorable outcome than the carrier did. Had I been in the scenario, I likely would have escalated the situation as high as I could within the carrier organization. Regardless of what the outcome was, I would have rather done battle with the carrier than let the customer continue taking advantage of the situation.

While it would have been nice if the agent had the security of some sort of exclusive letter of engagement with the customer, in reality that type of relationship would be hard to negotiate in today’s market. Likewise, even with such a contractual relationship, it may not have prevented the customers from haggling as they did to drive the price down.

How could the carrier have acted to achieve a different outcome?

Ireland: The carrier did what was in their best interest, unfortunately. To the extent a carrier can even the playing field between their agent and direct programs, they should. This is not always the case and the result is situations like these.

Praske: In scenario 1, the carrier should have processes in place that track who’s working which opportunities. They should provide pricing on a level playing field to all sales channels. If they find an alternative access method that lowers pricing, or introduce a new promo, they should proactively amend their pricing to all. It was good, and appropriate, that the carrier made the discounted pricing available to the agent. We would argue that if the carrier approved a 30 percent reduction for a direct rep without informing the agent, then the carrier should have agreed that the agent would be paid no matter who secured the order. We’re pleased to see the account renewed at the same rates. Typically, if a carrier is 50 percent below the market (20+30 percent), that usually points to a pricing error or the carrier may be imposing miscellaneous charges to recoup their lower recurring charges. Our team would perform a first bill review to insure the customer is being billed the contracted rates.

In scenario 2, we would argue that pricing from carriers should not vary by sales channels. If it’s a carrier that allows an agent to set pricing at higher levels, then it’s understandable if you encounter lower pricing from another agent/channel. There are some issues today where carriers are automating pricing. Typically, they employ a process to secure lower, special pricing. If you present pricing from their online tool and only provide standard discounts, you run the risk that another channel will go for special pricing, which undermines your credibility with the customer. So, carriers are training agents to go for special pricing in all circumstances to mitigate that risk.

The mitigating factors are a huge breach of partnership and set a carrier up to have reps that will damage their business. We find that some carriers who allow these actions have a tendency to only consider the one sale that is being directly affected. They tend not to consider the damaging effect on the partnership that causes our team to avoid including them in future opportunities. The carrier may wrestle an account away from us, but that could cost them millions of dollars in future business. It doesn’t take long to find out if a carrier has systems that allow their direct reps to see information on opportunities that we bring to them. We avoid carriers that breach this confidentiality. It’s sad to say that we’ve found this occur more in the past year than in our previous 17 years.

Fair: It appears that the carrier is good from the standpoint of allowing multiple channels to bid on opportunities. Carriers should never allow the first channel to bid to own an opportunity, which I have seen and don’t advocate. Different partners and direct may offer different solutions, packages with their core services, have different relationships, etc. – all of which should be exploited to make sure that the carrier wins relative to other carriers. It does appear that at this carrier there is a culture of allowing channels to underbid each other. Every effort should be implemented in order to eliminate this type of behavior including potential termination of the offending channel (and yes this goes both ways — direct and indirect). The culture of fairness and ethics needs to be driven by the senior management of the carrier. The carrier must ensure mechanisms are in place and catch these opportunities to create pricing anomalies through the special pricing process at a minimum.

Anderson: The most effective measure the carrier could have taken to avoid the outcomes would be to have governed the presentation of pricing much more strictly. If these scenarios are common within the carrier, it would not take long to rack up enough lost profits to fix the quoting infrastructure several times over. A system that effectively locks a customer to a sales entity, be it direct or indirect, would allow problems like these to be sorted out before someone started dropping their pants on pricing. With such a system the carrier could control that competition in advance.

Although it is not mentioned in these scenarios, it is probably safe to assume that no disciplinary action was taken against either the agent or the direct rep. In both cases, if the direct rep did indeed come onto the scene after the opportunities were already quoted, attempting to win the deal by eroding the carrier’s profits should be grounds for dismissal.

What other conclusions can you draw from these scenarios?

Ireland: Competition for new customers is tough and customers are price-driven initially. Price gets a salesperson in the door. Presenting a compelling service and value proposition after the sale is key to agents winning the business even when a carrier is attempting to undercut the deal. Try quoting the business through a reseller who does not have a competing direct sales force — your customer information won’t end up on a direct sales rep’s call list.

Fair: These are common issues that occur and need to be addressed by all carriers. In addition, customers are knowledgeable of varying rates and the ability to go to special pricing for larger deals and will pit different channels against each other. The carrier must embrace different channels going after opportunities but ensure there is not a sharing of information and in addition they must foster a spirit of healthy competition between channels with proper mechanisms in place to establish a fair and ethical environment for both channels to thrive. All channels are valuable and needed to succeed in this economy.

Praske: As agents, we need to constantly work with our carriers to build the strongest relationships possible. If we only battle over specific accounts, the relationship will collapse. So, agents – and carriers – need to invest the time and effort outside the account activity to build a strong relationship that can be used to avoid these kinds of situations. The channel is a great tool for customers and carriers to use to redefine the purchase of services. Over the years, the customers are trained to “bid” their services and go through an excruciating process to get the services they need, with the support they require, at a fair price. A good, knowledgeable agent should spare the customer of that ugly process while identifying the best providers, backed up with the appropriate support and at the best price. And, the agent spares the carrier of the equally ugly process on their side.

Anderson: These scenarios illustrate the fact that many carriers pursue business on a short-term, quarter-by-quarter basis, either to hit Wall Street expectations or to make revenue benchmarks to ensure continued private funding. The culture that this mindset creates is one that prioritizes getting a sale – any sale – at any cost, regardless of its impact on current or future profitability.

Most carriers operate with a deal-by-deal view on profitability. If a deal makes some money, all lights are green. Never mind that the pursuit of that deal reduced the overall profit potential of the company or set price precedents that would impair future profitability. With a corporate culture that is as short-sighted as many carriers’ are, those considerations simply don’t compute.

Perhaps most frustrating is that many agents have limited options for recourse. Most carrier agreements tie commission percentages to ongoing production, so an agent often cannot simply decide to stop selling a carrier’s services without risking decreasing commissions on the existing base. For master agents in particular this can lock them into doing business with a bad carrier just to safeguard commissions.

Finally, a question worth asking is what the customer could have done to achieve a different outcome. Although to different degrees, in both cases the customer controlled the situation and designed to pit against one another two salespeople representing the same company.

While you cannot fault the customer for trying to get the best possible value, you do not have to be an MBA to understand that a deal must allow everyone to benefit appropriately. Even ignoring the decrease in commission for the agent and revenue for the carrier, a customer that treats his vendors with such disrespect will not find himself at the top of the priority list when things go wrong.

We in the industry lament the commoditization of our services, while our customers lament the low standards of customer service. Premium service commands premium pricing, and for good reason – customer service is not cheap. Customers, carriers and agents would all be wise to see the connection between those issues.