Cost Cutting: The Money Pit

They're the line item from hell: telecom costs. Most companies charges have doubled while rates have actually fallen. Here's how to get a grip on them.

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Cost Cutting

Last autumn, Vivek Wadhwa was scared. Really scared.

Just a few months earlier his company -- Relativity Technologies, in Cary, N.C., which helps businesses update computer systems -- had been soaring at enviable heights. Relativity ended 2000 with $10 million in revenues. Back then, Wadhwa recalls wistfully, "we were anticipating triple-digit percentage growth and double-digit profits." In the first quarter of 2001 he was preparing to take the four-year-old company public before year-end.

But by summer, Relativity was fighting for its life. Recession-panicked customers postponed or canceled scheduled upgrades; between March and mid-July, Relativity didn't close a single new deal. Wadhwa idled 10% of his 175-person workforce and gave everyone else, including himself, pay cuts of 12.5% to 20%.

And it still wasn't enough.

So last fall he started digging through the company's expenditures, mining for potential savings. When he examined the telecom bills, he hit a mother lode: Relativity was spending more than $160,000 annually on voice and data services. Digging further, Wadhwa discovered nugget after nugget of wasted expense. Overseas calls that were billed home at $4.65 a minute. Domestic calls that were billed to a big-name calling card at 18¢ a minute plus a 90¢ "connection fee." And conference-call bills that approached $30,000 a year. Wadhwa characterizes those expenditures as unacceptable even in good times and personally painful in bad ones. "These costs," he reminded employees in a December 2001 memo, "are literally coming out of your salaries as well as mine."

Relativity's experience is far from rare. Total telecom costs -- including charges for phones, cellular services, pagers, toll-free numbers, fax lines, and data communications -- often rank among a company's top five expenses. Per-employee expenditures have doubled since 1996, now averaging $3,000 to $5,000 a year, according to the Aberdeen Group, a Boston-based research and consulting firm, at a time when rates for some telecom services -- such as long-distance and wireless -- have actually dropped by 30% to 50%. Yet many CEOs (40%, according to one International Data Corp. survey) haven't a clue about what their voice and data services actually cost.

Why the disconnect? For some companies, such as Relativity, it was the by-product of a strong economy. "When things were going well, I didn't have time for this," Wadhwa says of his telecom-bill treasure hunts. During the heady dot-com days, he focused on growth rather than cost cutting; in particular, he considered telecom expenses a cost of doing business.

Such ignorance isn't cheap. Gartner Group says companies typically waste 10% of their telecom budgets on outdated services -- old high-rate cellular plans, for instance -- or errors, such as the wrong rates, duplicate bills, incorrect taxes, or inaccurate charges.

One of the more common telecom money pits: unused phone lines. "Let's say you're changing locations," says Tom Heslin, founder of Sunsar Communications, a telecom agency based in Trumbull, Conn. "You order service for the new location, and you order disconnects for the old location, but it never gets disconnected." Or you simply assume your carrier will shut off your old service. Or you transfer employees around your site without moving their telecom services.

In all those cases, the meter may keep running indefinitely. One of Heslin's clients found that it was paying for lines in a building that it had vacated three years earlier. Companies don't always have to eat such losses, however. TelData Control, a telecom consulting and auditing company in East Rutherford, N.J., wrangled a $71,000 refund for a client who for five years had paid for lines that were never turned on.

Another sinkhole: mystery services that companies don't realize they have. Think voice mailboxes for long-departed employees or call waiting on fax lines. Heslin recalls asking one client company about its T1 line. "We've never had one," the staffers replied. "I said, 'Look, it's right here on the bill," Heslin recalls. "The silence in the room was palpable." The line, left by a former occupant, had been live but unused for years, and Heslin's client was paying $500 to $600 a month for it.

How come nobody notices?

Telecom costs often spin out of control as businesses expand. "The more remote sites you have, the uglier it gets," says Aberdeen Group senior analyst Dana Tardelli.

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