Posted: 12/2003

The Rise of the Professional Services Agency
Part Agency, Part Consultancy, Hybrid Firms are Taking a Piece
of the Midmarket
By Khali Henderson

A new type of company has emerged
from the telecom bust of 2000. Its services include business continuity
planning, traffic analysis, least-cost routing implementation, RFP creation,
proposal consolidation, customer service record analysis, bill consolidation,
telecom spending management and forecasting, telecom auditing, online telecom
inventory management, network design, project coordination of service delivery,
online order tracking, supplier selection and management, and ongoing customer
support.

While this describes services provided by large professional
services firms charging Global 2000 companies high fixed fees and huge hourly
rates, this portfolio now is being provided to cost-conscious midmarket clients
for low and sometimes no fees by a new breed of telecom consulting firm that
derives its revenue from suppliers of network services rather than from its
clients.

You may be thinking the model sounds like a traditional
telecom agency. Indeed, these consulting firms lets call them
professional services agencies are similar to traditional agencies in that
they work to achieve recurring revenue streams from service providers by winning
network services contracts. Whats different is that their goals are to become
clients outsourced telecom departments by providing better service more
cheaply than they could on their own.

As such, professional services agencies say they typically
incur more back-office expenses than traditional agencies as experienced,
high-dollar project managers, provisioning managers, network engineers and operations specialists are required to
provide the lengthy list of consultative services noted above. (Anecdotally,
payroll absorbs about 80 percent of the margin, according to one source.) While
there remain some similarities with master agencies, (which also are
increasingly taking on backoffice functions for carriers) one notable difference
is professional services agencies maintain few or no subagents. They rely
largely on employees to deliver consultative services to their clients.

Our back office systems must do more than off-load
functions from the carrier such as order tracking, which we do and the carriers
love, but in our model, since we are a professional services company, we must
offload functions from the clients as well, says James Larsen, co-founder and COO for NetGain
Communications, one of these self-described hybrid agencies. Such client functions might include Web-based
telecom inventory management and bill consolidation in the case of multiple
vendors or multiple sites. These additional overhead expenses in turn reduce net
margins and require professional services agencies to focus on larger accounts.
Targeting customers with total telecom spend of $5,000 per month is typical,
though its not uncommon to win customers spending in excess of $100,000 per
month.

Furthermore, Larsen says hybrid firms like his seek out
carriers not with the highest commission rates, but with the best install
records, seamless turn-ups and high level of customer service. The reason is
that higher gross margins dont necessarily translate into higher net margins
under this new model as the consultant has created and is responsible for
implementing the project plan on time and on budget, he says. Any hiccups
could result in penalties or require more onsite personnel and, in turn, incur
more costs. Worse, the client could be lost.

Where did professional services agencies come from? As
carriers downsized or simply went belly-up, they let go of some of their best
talent. Many displaced executives landed at traditional agencies that saw the
potential benefit of having engineering, provisioning and product specialists on
their staffs to win large customers and provide enterprise-grade services.

Total Network Services (TNS) is one example of an agency that
has made this transition. J.T. Thorman, a co-founder of 8-year-old Woodstock, Ga.,
company, says TNS was a successful traditional master agency serving more than
160 active subagents nationwide and more than 4,500 customers. After deciding in
2001 to change its model to a full-service consultancy targeting large
businesses, TNS now has less than 35 active subagents. We converted most of the remaining agents to referral
partners, says Thorne. In addition, TNS added six employees and began
providing consulting services directly to customers. We used to just provide long distance at a low price, but
now we are essentially the telecom department for our clients. This is an
impossible conversion if you dont have experienced telecom people on your
staff, he says, noting 35 percent of his companys revenue now comes from
10 very large clients.

While some laid-off telecom veterans ended up at companies
like TNS, others simply started their own consulting firms. After selling CLEC
Net2000 Communication in late 2001, Peter Callowhill and Larsen founded NetGain,
for example. Either way, they view the revenue model of traditional agencies as
a means to deliver services to their clients at reduced cost or no cost. Our
initial strategy was to build a full-service telecom consultancy, and we
recognized that in challenging economic times we did not want to charge our
clients a lot to have access to our experience, says Callowhill, who is CEO
of NetGain. Weve been utilizing the agency model to help eliminate
or offset the cost of bringing a high level of service to our clients, and it
allows us to compete with the big traditional consulting companies.

In the midmarket, companies have been outsourcing business
functions such as human resources, information technology and telecom equipment
maintenance to professional service organizations for years. To capitalize on
this trend, these new agencies present themselves as professional services
companies and offer services such as network design, business continuity
planning, and least-cost routing analysis that in the past were available only
to large customers.

Larsen, a veteran of professional services firms, says it is
not uncommon for a 1,000-person company to pay a professional services firm
$200,000 for network design and business-continuity planning for a headquarters
and up to 10 branch offices. In addition to this hefty project fee, there can be
ongoing maintenance fees in the neighborhood of $5,000 per month. Both are on
top of any network service costs from service providers.

Joe Meehan, director of administration for the National Right
to Work Committee and a customer of a professional services agency and its
supplier United Carrier Networks, agrees. Were getting a tremendous value. I could never afford to
have support staff providing these services, and for a cost conscious nonprofit
organization, traditional consultancies are out of reach, he says.

Meehan, who is experienced with both traditional agencies and
traditional consultancies, says these new firms bridge the gap between the two.
Clients are benefiting from having telecom experts capable of solving
complicated telecom problems, designing sophisticated state of the art networks,
and providing ongoing project management and client support, he says. They
offer clients an affordable alternative to either hiring more staff or paying a
higher cost telecom consultancy.

As for client concerns about perceived bias toward the highest
commission-paying carriers, these consulting firms dispel them as they do not
require the extra percentage points to pay a downline and, choose carriers based
on performance criteria first and foremost. Additionally, most include a comprehensive selection of
carriers and commonly answer RFPs based on network providers dictated by the
client.

These consulting firms also offer benefits to suppliers. Not
unlike master agencies, they offload back-office work and generate large volumes
of traffic albeit with fewer but typically larger orders. They also offer
some additional perks. According to Chuck Queri, vice president of sales for US
LEC, a superregional telecom carrier, The agents we have with this model have
seasoned telecom people on their staffs, and when they recommend US LEC, it is a
strong endorsement to the customer. The customers they bring US LEC are typically large, with
mission-critical telecom needs. US LEC thrives on serving this kind of customer,
so from our perspective, thats a very good thing.

Queri also says the extra services these companies provide
enhance US LECs offerings. US LEC once won a large client through one these big
agencies primarily because we were a part of a larger business continuity plan.
Our diverse fiber rings were touching a CO that was important to the overall
network design, he says.

Doug Smith, executive vice president for United Carrier
Networks, has a different perspective. At UCN, we do not have a direct sales
force and rely completely on our agents. These consultancies are our best avenue to move up market.
Recently, weve had one such company bring us a new client that will bill over
$250,000 per month in dedicated long distance, and UCN was only part of the
solution for this client, he says. Smith adds the company would not have won
the business any other way. As UCN brings new and more sophisticated products
to the market place, we view these consultancies as partners who will embrace
and market our new technologies to larger customers.

Like UCN, other network service providers are beginning to see
these firms as partners in addressing mid-to-upper market customers just as they
currently view traditional agents as partners in targeting lower-to-middle
market accounts. Of course, proof of the model will be economics. If the
carriers see consultancies drive loyalty from their clients and turn large
customers on to new products, they are more likely to embrace this model long
term.