Telecoms - The carrier timebomb

In less than two years, the introduction of carrier pre-selection will make selling services, not boxes, the way to make margin. Before that happens, one company is racing to persuade resellers to tune into its special brand of telecoms marketing.

Energis, the telecommunication branch of the UK's National Gridon will make selling services, not boxes, the way to make margin. Before that happens, one company is racing to persuade resellers to tune into its special brand of telecoms marketing. electricity utility, has a very interesting business proposal for the UK IT reseller community. Pressed by its need to keep its cables and wires humming, the company wants to do everything it can to transform IT companies into telecoms resellers.

But time is running out. Energis needs to secure its business ahead of October 2000, when carrier pre-selection will throw open the gates to UK telecoms users. In the US, where this model has existed for some time, leading carriers have suffered market erosion at the hands of 'switchless resellers'.

Switchless resellers are a relatively new breed. To their customers, they look just like ordinary telecoms companies, but they do not own any telecoms infrastructure. They are a service organisation pure and simple, reselling a multitude of telecoms services.

In the UK, carrier pre-selection is sure to bring about a sea change.

Users will be free to specify their carrier without having to use access codes, smart boxes or manual dialling. This will have a sweeping effect on telecoms hardware sales, increasing competition between carriers and undoubtedly generating a fair amount of churn.

Energis is hoping to seize the initiative before that happens. In recent months, the company has hit the road to pitch its Route to Resale scheme and in doing so has pitted itself against industry heavyweights such as BT and Mercury. What these giants can do by dint of their size, Energis is planning to do with its wits.

Energis is accustomed to boxing clever. It first attracted the attention of the IT reseller community earlier this year after acquiring Planet Online, the UK's largest independent internet service provider (ISP), for #75 million. Its move into the ISP space had several interesting aspects, one of which was revealed when it was named as the provider for Dixons' free internet service, Freeserve. Energis, with its innovative approach to telecoms, is also expected to make moves into internet telephony.

Energis already carries about 40 per cent of UK national internet access traffic and is enhancing its position in this market through the deployment of its recently developed carrier scale IP technology. But in its Route to Resale plan, the company is using old-fashioned sales leverage, rather than leading-edge IP technology, to increase its market presence.

Andy Irvine, head of indirect channel marketing at Energis, explains the scheme. 'This is the first time that resellers have been offered this kind of opportunity in the UK and we aim to start off with a bang,' he says. 'This is a new model for reselling telecoms. It's not like commission sales because you get to keep your customers. We did close to zero per cent of our business through resellers two years ago and hit five per cent last year. Our plans are to take the reseller share of our revenue to 13 per cent this year and then build on that figure.'

Redstone, which declares itself to be the UK's fifth biggest carrier, also has designs on the reseller market. It announced its intentions back in September but has yet to launch a concrete scheme.

Anyone with a customer list and an inclination to mine it can get in on the Energis deal to become a switchless reseller. As bait, the company dangles the example of an reseller in Manchester that pioneered the scheme back in 1995 with 150 customers and #3,000 per month billing.

Today, that company is billing #700,000 per month, has 14,000 customers and employs 30 staff instead of only five. It has even recently received an offer for the business equivalent to 12 times its monthly revenue.

David Kettle, senior account manager for indirect sales at Energis, explains the rest of the scheme. 'Now is the time for us to build business by creating opportunities for business partners. The regulatory environment is supportive and we have the transmission capacity and quality of service. Customers are much more aware of telecoms choices now than they were in the past.

This is a great sales opportunity for anyone who wants to extract additional value from their existing customer base.'

Tom Price, a representative of Stanhope Communications, which provides telco services, says: 'It's an interesting offer. For anyone who is already involved in telecoms, it could prove to be a winner, given the right customer list. The internet will certainly play a large part in containing costs and delivering additional services.'

The basic idea of the Route to Resale is for resellers to capitalise on their customer base by selling additional services. It is, Energis maintains, a good way of blunting the effects of decreasing margins in hardware sales, or indeed the loss of sales of devices that will be redundant by October 2000.

In return for resellers taking on the business risk, Energis is prepared to offer a gross margin of 35 per cent of sales. Even with allowances of three per cent for invoicing and bad debt insurance and two per cent billing costs, it leaves a handsome margin of about 30 per cent. This compares rather favourably with commission telecoms dealer fees of just a few per cent. There's good money to be made even by offering rates that undercut BT by ten per cent.

Obviously, if dealers have an interest in telecoms, they may already be selling hardware into accounts that might be interested in having more of their needs handled than just the boxes on the wall.

The appealing aspect of the arrangement for IT resellers is ownership of the customer. They can build that customer base into something that is of value to their business, in stark contrast to the agency or dealer commission sales way of selling telecoms. They are also free to set their own rates, do their own marketing in the way they want and even give away hardware if that is an inducement that customers are likely to respond to.

But there is a downside, as Kettle points out. Energis is shifting business risk and a good portion of the service element of telecoms provision to the resellers. Clearly, they get their generous margins only if everyone pays and if they can keep their customers happy. In a telecoms reseller arrangement, the reseller carries the can.

Billing could also be a valid concern for inexperienced resellers. Any itemised listing presented to a customer, potentially containing dozens of contentious elements, could be something from resellers' worst nightmares.

According to Kettle, though, the billing problem is already less severe and in the future may disappear altogether.

Accurate, fast billing is essential to staying alive as a telecoms reseller and Energis is confident that it has the problem sussed. Getting the billing right builds customer confidence and eliminates the primary reason for customer care contact. It also goes a long way towards keeping cash flow positive, Kettle explains: 'Energis guarantees billing within four days of the end of a billing period and will give 45 days credit. You can have the figures daily via a Website or monthly on a CD-Rom.'

Customer satisfaction is the key and that holds no surprises for resellers, themselves considerable users of telecoms services. If installation is rapid, calls always get through and PBXs don't crash, there is little room for the customers to complain.

Energis wants to take the service element even further with a sophisticated fraud monitoring system that can identify a bogus late-night call or a PBX hacker. It is featuring this as a unique selling point, offered to the company's resellers to pass on as a way of adding extra value.

The company says it is looking for resellers that can make a #25,000 per month commitment but is willing to discuss near offers. For hardware resellers that have been dabbling in telecoms equipment for a while, this opportunity to branch out could have considerable appeal. The amount of capital at risk is small in proportion to the potential returns.

The telecoms market won't remain static, however, and the 35 per cent gross margin that Energis is brandishing is likely to wither in the heat of the competitive forces that are about to be unleashed. A great deal can happen before October 2000 in the fast-moving world of telecoms but taking advantage of Energis' Route to Resale scheme could be worth considering.

Open membership to resellers' Club

Much of Energis' confidence that billing will cease to be a problem for resellers arises out of its association with Club Communications.

Club started out as a telecoms dealer, then became a reseller, and along the way discovered how to make the business work. It has hit most of the bumps in the road already and is willing to share with others the tools and expertise it has gained - at a price.

Club Communications was launched in April and has signed up more than 40 dealers in that time. Quite simply, it offers complete switchless reseller know-how in a box package deal built around software that the company itself has developed. If customers want it, the company can do everything for them via a bureau service.

There's no rocket science involved in becoming a switchless reseller, according to Tony Lewis, managing director of Club Communications. 'Everything you need is in our Billie billing platform,' he claims.

Energis has agreed for a limited time to underwrite the #18,000 fee that Club charges for its bumper bundle of software and business process knowledge, to the tune of #10,000. 'That's it, all in, all up front. You can become a switchless reseller if you have a customer list to exploit and #8,000 in cash. We will even do your billing for you for 2.5 per cent of your gross billing. By the time your billing reaches #10,000 or #15,000 per month, it will be well worth your while to take it in-house,' Lewis explains.

Billie can handle up to #800,000 per month billing and includes a competent PC and all necessary hardware except for a printer. Club Communications says the bundle is easy to use for anyone who can handle a Sage accounts system and claims that just an hour a day is all the attention that Billie needs.

Club can provide other services of interest to a novice switchless reseller, including a comprehensive package that includes customer credit checks through London and Zurich, trade insurance and a hard-to-get direct debit facility.

Club can also provide bulk discounts for auto-dialling, necessary until October 2000. The price is three per cent.

Paul Falgoini of KT Electronics in Cardiff says: 'For a very small reseller like myself, the price of entry is very reasonable. It will require some marketing expertise, however. If Club Communications has all the right stuff in its Billie bundle, then this scheme is well worth considering, even for a very small reseller/consultant."

Lewis maintains that the switchless reseller business will become easier as customers realise that they really don't want paper bills any more.

'Who in their right mind wants to pore over a document a month old, 237 pages single spaced, filled with numbers? By being offered a chance to get real time billing information over the internet, customers will save time and money, and so will their switchless reseller,' he claimed.

It is also the way to deliver better service than most customers are likely to get from their current telecoms carrier. 'In the long term, the battle for a telecoms customer will be fought on service, not price.

Customers buy on benefits - it is almost impossible to sell strictly on savings,' says Lewis.

In addition to its basic Billie package, Club will provide InterBillie, internet bill raising software and Call Guardian, a management by exception package that protects customers from telephone fraud and can give resellers a much-needed boost in keeping their customers close to home.

'Once you have trained your customers to realise that looking at their telecoms bills is a waste of their time, any bill activity is a signal to the reseller that there is a customer with a question on its mind. If that question is "Should I change carriers?" giving the customer a pre-emptive call just might save the account,' Lewis explains.