Posted: 03/1999

Customer
Service, Contracts and Equity
An Agent Roundtable
–Part Three

PHONE+ recently hosted an editorial roundtable with several members of the now-infamous
20 Group, a band of independent agents that frequently assembles to share experiences and
insights on the business of selling telecommunications services independently.

As every agent manager knows, independent agents won’t hesitate to speak their mind.
This dialogue was no different, but some of it was not for attribution. In those
instances, we utilized a fictitious character named "Fat Pipe." The discourse
was so compelling that we’ve decided to publish it all–in three parts. The first
installment, published in January, covered agent equity programs. Last month, our esteemed
panelists discussed customer service. This month, we’ll hear what they have to say about
contracts.

Roundtable Participants

Bob Titsch Jr.: Most agents say the majority of their peers are short-term
thinkers, unrealistic about rates and commissions and they don’t have an exit strategy. I
believe all of you have a lot of subagents. What’s your sense of the agent mix out there,
and the agent channel in general?

Bill Stevens: Most of the people who have approached us over the last year have
not been very good prospects.

Jim Gledhill: We don’t take on new agents anymore unless they have worked for a
long distance carrier or they have an existing base, because we’ve spent too much time and
money trying to train a bunch of these guys who thought they would get rich quick.
Inevitably, the bulk of them sign up their relatives and discover that being an agent
requires a lot more work than they anticipated, and you never hear from them again.

Ben Humphries: I think that’s an excellent strategy and one we should employ.

Michael Parizanski: I’ve also tried to attract other agents, and it hasn’t
worked out that well. I’m thinking about hiring some direct sales people. As far as the
channel itself, I feel that 80 percent of the agents out there are basically developing
themselves as order takers. That has to change. Agents are going to have to evolve from
order takers to professional marketing companies, and project a healthier image to end
users if we’re to keep this channel going in the right direction.

Jim Butler: The retail side of the house isn’t performing for a number of
carriers. And they’re getting pressure from their upper management to make their quotas.
But they’re having a hard time finding the right salespeople who will make a long-term
commitment to their company. So they’re caught in a Catch-22 situation, to our benefit
right now. We’re getting higher commissions and even equity plays as a result.

Bill Power: At the same time, suppliers need to understand that we’re not as
naive as we were five years ago. And we’re not going to settle for the contracts we were
forced to take five years ago. One of the reasons we formed this 20 Group was to share
information among successful, experienced agents. We’ve done that, and we will continue to
do that. We’re all going to become far more knowledgeable about how to succeed in this
business. Vendors can’t jam contracts down our throats anymore.

Titsch: Can you give me a couple of examples? (escalating LAUGHTER)

Power: In our early days, we naively agreed to "nonsolicitation"
provisions in our contract that stipulated that we would never move a customer no matter
how poorly they were treated by the supplier. We signed one of those contracts. That
simply won’t be in a contract that we sign today.

Jay Lewis: Eighty percent of the agents out there will sign a contract without
hardly reading it. But if carriers really want sales and production from the other 20
percent, they’re going to have to expect that, just like they have different pricing
plans, they need different agent plans. Knowledgeable agents today won’t settle for what
carriers might consider a standard deal. In order to get top producers, they’re going to
have to negotiate, and deal with some honesty and integrity up front.

Parizanski: Talent breeds talent. If carriers open up their pocketbooks and take
care of their top agents, we’re going to actually be able to hire more agents and put them
under our wings, which only increases the carrier’s revenue.

Titsch: Any other contract issues?

Gledhill: I don’t think we need to take any more bad debt. In the beginning,
when I got started, you had to cover some part of bad debt. I think most of us have been
burned by it.

Parizanski: I’m going to disagree with the bad-debt issue. As agents in the
business community, we need to try to be responsible with the business we bring to our
suppliers. And there should be some recourse for the suppliers to not compensate us on
customers who go belly-up. It’s our responsibility to know our customers.

Gledhill: But the customer’s profile will change in three years.

Humphries: As we move forward with these carriers, isn’t it a partnership
arrangement? Don’t we need to share in some of that?

Power: I don’t know about you guys, but I work a whole lot better when I have an
incentive to do things. I think there are two ways of looking at this whole bad-debt
issue: Incent me to work hard to reduce the bad debt, as opposed to penalize me when the
bad debt reaches a certain level.

Lewis: It’s kind of like raising a pet. (LAUGHTER)

Power: I’m pretty simple-minded, aren’t I? (LAUGHTER)

Fat Pipe: I happen to know a small reseller that just got stiffed $200,000 on an
account that its own direct sales team sold and its own credit department approved. The
customer was located at some slum address somewhere, and ran up all kinds of charges. By
the time the reseller got the first bill from the mother carrier, there was another half
month of billing, and the reseller was suddenly out a lot of money. These things do
happen.

Parizanski: Maybe carriers ought to implement a commission scale that gives you
a choice. If you want to accept responsibility for bad debt, you’ll make a higher
commission. If you don’t, you’ll make less.

Lewis: Either that or you can have a contract that pays you on billed revenue or
pays you on collected revenue. If it pays you on collected revenue, you’re only paid on
what’s collected.

Fat Pipe: If potential customers are questionable, I won’t send them to carriers
that don’t want questionable customers. I’ll put them on somebody who wants them
(LAUGHTER). Well, there are carriers–

Fat Pipe, Jr.: –Well, we all do that. If you get turned down on credit, you
move them to a carrier who will take them.

J.M. Neale, III: If carriers and resellers want to work with agents like
ourselves, who produce a lot of volume and who are in it for the long haul, they need to
be thinking real seriously about what a partnership means, which they haven’t been, even
up until now. One way to negotiate a contract might be the simplest way of all: to agree
to a percentage split on everything. If it’s fair to take the gross margin and split it
70/30 or 60/40 in favor of the agent, like real estate brokers do, then do that. You could
do the equity that way. You could agree on the percentage of cost for customer service and
billing, and do the same thing with bad debt. If you’ve got a 60/40 relationship with an
underlying network provider, and you’re sharing in the margins, you might be making a 25
percent commission instead of a 15 percent commission. At that point, you can afford to
share in the bad debt.

Power: A lot of bad debt is due to bad billing.

Greg Praske: That’s true. Is it late billing? Is it incorrect? Or is it bad
service? Is the provider not getting paid because the customer is so pissed off? There are
certain things that we can do as agents when good customers are being billed correctly. If
they are falling behind, we do have the relationship with the customer. We can call them
and say, "Hey, let me come over and pick up the check, and let’s send that in."

I think most carriers factor in 3 percent to 5 percent for bad debt, but to the extent
that we can help and improve on their situation, of course we should.

Lewis: I recently lost a customer that decided to go with a different carrier.
We had nothing to do with it. We lost the account because our carrier refused to match
this other carrier’s rates, so what did they do? There are no PIC (primary interexchange
carrier) restrictions in Michigan any more. Ameritech [Corp.] and MCI [WorldCom Inc.] did
battle over the issue, and the public service commission did away with them. Michigan is
the only state in the country that doesn’t have PIC freezes. And that’s a real problem
right now. So what happened? The customer sent in a cancellation letter. The old carrier,
which has auto PICing, re-PICed the customer five times in one month. The customer, who is
sitting there with a $6,000 bill, sends a letter saying he won’t be paying the bill. So
now the carrier is looking at us, and we didn’t even move the customer. They auto-PICed
the customer five times, essentially slamming them.

Neale: Now that’s a different story.

Ronald Bohm: I would bet that all of us have been stiffed at least once.

Parizanski: As far as a provider stiffing us, we don’t know when we’re being
stiffed sometimes. We can look at our commission statements, and we don’t know if they’re
accurate. That’s an entirely different subject, but there are resellers that choose not to
pay the carrier. And that’s when we get in trouble as agents.

Ladd Richland: We had a situation about four years ago when we signed an
agreement with a particular reseller that’s now out of business. Actually, it was sold,
and we’re still getting commission checks from the new organization. But we originally had
an arrangement where we were paying a certain percentage of our base every month for bad
debt. Midstream, without any negotiation, the new entity started paying us on collected
revenue instead of billed revenue. Based on the agents’ inability to get together and
fight what happened, we all let it happen. And that’s cost me several thousand dollars a
month in revenue, because now we’re waiting for customers to pay, and that wasn’t what our
original contract was. For 2 1/2 years, the carrier was buying bad-debt insurance from us
at 3 [percent] to 5 percent of our billing. And that actually worked out to be a better
deal for the agent.

Humphries: When we’re negotiating with carriers, I think it’s incumbent upon all
of us to go into their back office, to talk to their underlying carriers and do a lot more
due diligence than we’ve done in the past.

Praske: I think this is still an issue that we all need to work at because even
now, while most carriers have moved from paying on collected revenue to paying on billed
revenue, it’s usually paid 45 or 60 days after billing. And while we’re sitting here, our
customers are using a service that hasn’t even been billed yet, and that’s a result of our
work. We’re always holding a pretty good receivable from our underlying providers. And
we’ve been through three underlying providers that have declared bankruptcy.

Fortunately, with two of them, the writing was on the wall and we were able to take the
necessary steps beforehand to minimize the problem. But right now, we’re writing off a
huge receivable in the broadcast fax arena, plus we have to go back and resell all those
customers.

Fat Pipe: One of our resellers started billing one of our clients in the Bronx
[New York] 5 cents [a minute] to Jamaica, and got a real surprise because every Jamaican
in the Bronx used the phone–several hundred thousand minutes worth–and they were
supposed to be charged $1.50 [a minute]. I thought it was real nice of us to forego the
commission on that.

I went to the company and asked for financial proof that it could take that kind of
loss. I felt I had a right to do that, for my own protection. There are things we can do
as agents to go right at that problem.

Bohm: About three years ago, a company started slow paying me on commissions.
Eventually, we found out that there had been an asset settlement. The company had sold the
accounts to another company, which had not bought the liability of our contract. And so
all the back commissions that hadn’t been paid, and all of the commissions going forward
on those accounts were denied.

Stevens: They can’t do that legally.

Bohm: There were quite a few of us who were affected, and we all contacted
attorneys. But they got away with it. And then they closed their shop after they sold the
assets. They bankrupted the company as soon as they sold the base.

Praske: It seems like one way around that problem is to only deal with major
organizations.

Kenny Wilder: Amen.

Praske: Smaller organizations, or resellers, have to figure out a way to put us
in a position financially so that we’re not holding a big receivable. Because stories like
Ron’s certainly encourage us to do business with the first- and second-tier carriers.