1. Managing Maintenance
and Support Costs
Cutting operating expenses by analyzing
and negotiating service contracts
By Ron Lev and Vikrant Viniak

2. 1
Few business organizations of any size can survive for
long without reliable IT hardware and software. And no
organizations are more dependent on their IT infrastructures
– in particular their network hardware and software
– than global communications network operators and
multiservice operators (MSOs) such as cable operators
and telecommunications companies. Simply put, without
the routers, switches, optical transport systems, and other
network equipment in their IT infrastructures, these businesses
could not deliver revenue-generating services at a level that
meets their customers’ expectations. Given the strategic
importance of this equipment, it is no surprise that investment
in networking hardware and software claims a large share of
the capital budgets at these companies, and the contracts to
maintain and service the network infrastructure represent a
significant operating expense. For many MSOs, these contracts
offer a significant opportunity to realize substantial cost
savings – an opportunity all too often overlooked.
Most MSOs use strategic procurement
(multiyear, cost-advantaged agreements
with key suppliers) to manage, and
in many cases reduce, their capital
spending on network equipment. Far
fewer, however, view the contracts for
servicing and maintaining that equipment
through a strategic lens. Accenture
believes that doing so can yield significant
reductions in operating expenses while
at the same time achieving a tighter
alignment between business strategy
and the service and maintenance levels
necessary to support the business.
What’s more, recent developments in the
network-equipment marketplace offer an
exceptional opportunity to restructure
service and maintenance agreements on
terms far more favorable to equipment
purchasers than their current agreements
afford them. While negotiations alone
can generate savings of 5 percent to
10 percent on average, MSOs and other
communications-intensive businesses
can realize far greater operating-expense
reductions – up to 90 percent – if they
prepare for negotiations by analyzing their
existing servicing deals and using the data
derived to determine the optimal level and
cost of support across the entire range of
their installed base.
This Accenture Point of View presents
a framework for analyzing network-
equipment service and maintenance
contracts and using the data generated by
the analysis as the basis for negotiating
new contract terms. The process can
be lengthy and challenging, but the
potential payoff is sizable. The analysis
clarifies the relationship between capital
expenditures on network equipment
and the operating cost of maintaining
and servicing it. It also opens a path
toward striking a better balance between
the cost of maintenance and service
contracts and the value they deliver.

3. 2

4. 3
Analysis Reveals the
True Value of Services

5. 4
Our experience performing this analysis
with clients has revealed that the cost of
some maintenance agreements was far
greater than the value of the service they
received. One client was paying a vendor
$1.7 million annually (aggregated across
several contracts) to ensure software
and hardware support and immediate
replacement of failed switches. The
analysis revealed that the cost per activity
– that is, the cost of a service incident
such as a support call, hardware repair, or
software patch or release – was extremely
high, compared with the value received.
This finding provided powerful leverage
that enabled the MSO to negotiate
new service agreements that sharply
reduced the cost per incident. Figure 1,
below, breaks down the various activities
provided in 1 year (cost $1.7M).
The changing conditions in the network-
equipment market offer MSOs an
additional negotiating lever to reduce
both capital and operating expenditures.
Vendors of network hardware and
software are consolidating rapidly,
resulting in a greater diversity of products
offered by a single vendor and creating
opportunities to reduce support costs.
These developments create an opportunity
for network operators to:
• Concentrate capital spend with key
approved vendors, especially when
they offer multiple product categories.
As a vendor’s share of the MSO’s
procurement budget increases, so does
the vendor’s incentive to improve the
terms of its service contracts.
• Negotiate an umbrella service
agreement with a single vendor that
supplies multiple products in the
operator’s installed base, especially
when products formerly on multiple
platforms are consolidated onto a single
platform.
• Renegotiate service contracts when
an incumbent vendor acquires another
incumbent vendor. The acquirer is
usually the larger of the two vendors
and can leverage economies of scale to
deliver more appropriate service levels
at lower cost than those originally
negotiated with the acquired entity.
# of Onsite
RMAs
# of NBD
Depot RMAs Priorities # of TAC Calls
# of Software
Releases
# of Software
Patches
Deployed
8 10
P1 14
4 6
P2 28
P3 4
P4 0
Figure 1: Value analysis reveals the cost per service is extremely high, compared
with the value received.
One client was paying
a vendor $1.7 million
annually (aggregated
across several contracts)
to ensure software and
hardware support and
immediate replacement
of failed switches.

6. 5
Performing the
Analysis

7. 6
The purpose of the service and
maintenance analysis is to create a
detailed picture of the true cost of a
network operator’s support agreements.
Once an operator has determined that
cost, it can devise a support mix that
aligns the strategic importance of item in
its installed base with the level and cost of
support it requires. Metrics generated from
the data captured in the analysis drive the
negotiations necessary to achieve the right
level of support at the right cost. Figure
2 depicts the overall flow of the contract
analysis and negotiation process.
Let’s now take a closer look at each part
of the analysis that generates the data
used in negotiations.
Categorizing the support spend
The purpose of this exercise is to break
down service and maintenance spending
by vendor, type of equipment, depreciated
cost, service area, operating entity, and so
on. For each item on the equipment roster,
the analysis should also include details on
its related service level agreement (SLA),
the contract that spells out the terms,
conditions, and cost of the services that
the vendor will provide. Figure 3 provides
a glossary of the most common types of
service and maintenance contracts and
rate structures.
Verifying support-charge
calculations
After gathering and validating data on
service levels and maintenance spending,
the next step is to verify each vendor’s
basis for calculating support charges
for each category of equipment. Most
vendors can supply at least one or
two years’ worth of detailed support-
charge quotes. Because many support
contracts call for calculating service
charges as a percentage of net price,
the network operator should verify that
the value the vendor assigns to each
product agrees with the value assigned
by the network operator. If the vendor
is supplying equipment pursuant to a
recently negotiated strategic procurement
agreement, the MSO can usually demand
that the embedded base cost be adjusted
to the standard or lowest price paid,
rather than higher price charged before
the sourcing agreement took effect. One
client recently slashed about $1 million
from support costs simply by reducing
the baseline value of a single supplier’s
equipment by roughly 25 percent.
Tailoring the support mix
Now comes the crucial step of aligning
service levels to business strategy. A
detailed comparison of support costs
against value received will likely show
that some hardware and software can be
supported at lower service levels without
significantly impacting their reliability
or compromising the network operator’s
Figure 3: Common types of service and maintenance contracts and rate structures - Service Level Agreement Overview
Level Description
Rate Per
Service Total Rate
Hardware
(HW) & Net
Appliance
Products*
HW
Warranty
Replacement Maintenance Agreement
(RMA)
30 day HW fix & return service
0%-3%
3%-15%
Nexr Business Day (NBD) RMA Next business day return* 1.5%-5%
4-hour RMA 4 hour warranty return* 1.5%-5%
Software
(SW)
Warranty
W only New product releases and features as they are made
available
Patches and workarounds to correct problems 2%-13%
9x5 technical support Basic coverage during working hours
24x7x365 support On-call support 24x7x365
On-Site Dedicated on-site resources Time and
Materials
Time and
Materials
Software-
Only
Products
SW
Warranty
and
Support
Warranty only New product releases and product improvements as
they are made available
Patches and workarounds to correct problems
Telephone assistance
Support on a per license rate
8%-25% 8%-25%
9x5 technical support
24x7x365 support
On-Site
*NetAppliance refers to all products which are based on generic hardware but still part of the network such as VideoOnDemand, VoIP etc.
Figure 2: The value analysis process
1. Data Verification
(Inventory, Budget)
1. Gather relevant contracts information
into one place to identify likely
targets for negotiation
2. Relevant information includes:
- Support cost and terms
- Expiration
- Embedded base
- Future plans
1. Gather value based metrics based
on total number of RMAs, calls &
Software fixes/upgrades
2. Discuss Service level requirements,
sparing capabilities, etc...with key
stakeholders
3. Decide on next steps for vendors
1. Complete value analysis
2. Create talking points for vendor
discussions
3. Develop target asks
4. Communicate plan and get
approval from stakeholders
1. Communicate value based message
to vendor
2. Send asks ahead of conversation to
allow time for response and reduce
cycle time
3. Determine strategic and operational
risks of reducing or eliminating support
3. Value Based Analysis
& Negotiation Strategy
4. Fact Based Vendor
Negotiation
2. Operational Stakeholders
Engagement
Key Steps

8. 7
strategic objectives. By the same token,
however, some equipment may be so
strategically important that it requires
a more advanced – and therefore more
costly – service level. Even so, there
may be other ways to cut support costs,
such as switching to a fee-per-incident
pricing model or dropping RMAs for some
hardware and keeping spares in inventory
instead. Just as no two companies have
identical strategies, no two companies
will have the same optimal service mix
– the point of the analysis is to arrive at
the mix that best matches a company’s
unique strategy and network architecture.
Figure 4 shows a typical menu of SLA
options that operational stakeholders
can refer to during internal discussions
aimed at determining the optimal support
mix, prior to opening negotiations
with vendors. As the menu shows, the
SLA options will vary according to the
equipment type, fault history, and the
vendor’s sensitivity to negotiating levers.
Preparing the negotiating data
Having determined its optimal service
mix, including the appropriate methods
of calculating support charges, the
network operator can prepare for a
series of negotiations with vendors to
forge the SLAs that will make the mix
a reality. Metrics derived from data
generated by the support cost analysis
will supply most of the critical negotiating
points. Most operators find that they
gain the most leverage by expressing
the value of the support on a “cost per”
basis – cost per failure, for example,
or cost per help desk call, or cost per
on-site repair. These metrics help clarify
whether the cost of support is in line
with its value and whether a higher or
lower level of support is appropriate.
One client recently
slashed about $1 million
from support costs
simply by reducing
the baseline value
of a single supplier’s
equipment by roughly
25 percent.
Support Mix Change Options & Guidelines Technical Support Software Support Hardware Support
No change to SLA No leverage, smaller size or
terms already strong
No change in terms No change in terms No change in terms
Lower rate SLA Larger vendors who are
strategic and little leverage
Rate of X% of embedded base Rate of X% of embedded base Rate of X% of embedded base
Service level change Support levels too high
(can be used with others)
Standard technical support
at a rate of X% of embedded
base
Standard software support
at a rate of X% of embedded
base
Standard RMA service at a
rate of X% of embedded base
Fixed Fee Large, complex vendors
with multiple contracts
A flat fee of $XX for yearly
technical support issues
A flat fee of $XX for yearly
software support issues
A flat rate of $XX for RMA
service
Time and materials Vendors where little
maintenance is used, but
some coverage is needed
Time at a rate of $XX/hr per
person
N/A Time at a rate of $XX/hr per
person
Materials at current contract
rates
Pre-paid Vendors with moderate
level of support
XX tickets at a cost of $XX
with additional tickets costing
$XX
N/A N/A
Pre-Paid with carryover Vendors with moderate
level of support
XX tickets at a cost of $XX
Usused tickets carryover to
next year
Additional tickets cost $XX
N/A $XX for XX RMAs
$XX for XX NBD RMAs
Fixed fee and pay as you go Vendors with higher,
unpredictable level of
support
$XX flat fee for access to
technical support $XX per call
$XX flat fee for access to
software upgrades
$XX per software major
release
$XX per software patch
$XX flat fee for access to RMA
Service
$XX per RMA
Pay as you go Vendors open to model and
with stable support levels
$XX per critical call
$XX per major call
$XX per other call
$XX per major software
release
$XX per software patch
$XX per RMA
$XX per NBD RMA
Pay as you go with
incentives for strong
performanc
For reliable, strategic
vendors, who would be
unlikely to sign up for pay
as you go model alone
$XX per critical call
$XX per major call
$XX per other calls
$XX performance incentive for
less than XX combined critical
and major issues
$XX per major software
release
$XX per software patch
$XX per RMA
$XX per NBD RMA
$XX performance incentive for
less than XX RMAs
No coverage Vendors where sparing can
be used or support not
needed
Per tariff/posted rates May or may not be available Self-sparing
Figure 4: Typical menu of SLA options

9. 8

10. 9
Negotiating Strategy:
Timing is (almost)
Everything

11. 10
The timing of negotiations can have a
significant impact on their outcome.
While talks should ideally begin fairly
close to the expiration date of a current
support agreement, operators should
be prepared for delays and multiple
rounds, as vendors tend to work cross-
functionally and need time to coordinate
their sales, finance, service, and legal
teams. Whenever possible, network
operators should time support-contract
talks with a vendor to coincide with
planned equipment purchases from the
same vendor. One Accenture client, an
MSO, recently negotiated a suite of
support contracts with a vendor that
was the frontrunner to become the
favored supplier of a network solution.
That deal had not been concluded, and
the door was open for another vendor to
step in if the MSO and the prospective
favored supplier failed to come to terms.
With strong incentives to strengthen
its overall relationship with the MSO,
the supplier agreed to several support
agreements on terms highly favorable
to the MSO, reducing its support
charges (expressed as a percentage of
the installed base) by 40 percent.
In another recent case, Accenture
worked with an MSO to conclude
strategic procurement agreements
with a several key vendors and advise
on reducing support costs without
compromising reliability. That meant
negotiating new SLAs with more than a
dozen vendors. Figure 5 illustrates how
the MSO prepared for negotiations by
arranging vendors into tiers and crafting
negotiating strategies for each tier.
The MSO then scheduled negotiations to
begin at staggered, two-week intervals,
beginning with the strategic vendors, to
allow time for any necessary additional
analysis and to enable the MSO to use
the outcomes of early negotiations as
leverage with lower-priority vendors.
The MSO began negotiations with a
strategic partner that charged support
as a percentage of net price. Because
the vendor supplied a large share of
the installed base and could expect
the MSO’s purchases to escalate over
time, it agreed after little negotiation
to value its equipment at the lowest
price paid within a specified time
frame. That vendor’s baseline valuation
model became the standard expected
of all other strategic vendors. The MSO
also modified the pricing model for its
strategic partners, negotiating a switch to
a flat fee based on incremental spending.
By stabilizing support levels as the value
of the installed base grew, the MSO cut
its effective support rate – the cost of
support expressed as a percentage of
the aggregate net price of each vendor’s
equipment in the installed base – to 3
percent from more than 5 percent.
Such outcomes are typical. But the
negotiations that produce more favorable
SLAs are almost always lengthy and
involve constant reevaluation and analysis
in response to vendors’ counterproposals.
Recognizing that most vendors typically
offer counterproposals that deliver less
than desired, prepared operators will
go into each successive negotiating
round armed with data that supplies
the leverage needed to reach a better
outcome. We have found that a rigorous
support-cost analysis invariably yields
data that tells a compelling story – a story
that companies with large investments in
network infrastructure can use to create a
permanent operating-cost advantage.
Type* Description Savings
Strategic Contracts
(>$XXmm)
Negotiation strategy
• Usually requires involvement of senior leadership, as vendors in this category are long-term strategic partners
that have impact on many aspects of the business
• Most vendors in this category supply 3%-6% of embedded base - spend reduction can involve:
- self sparing strategy, SLA reduction and internal capability building
3-12%
>$1MM • Focus first on contracts where leverage exists, such as deals with vendors competing for upcoming capital
expenditures or vendors whose current contracts are near expiration
• Use value-based asks whenever possible, SLA examination with internal contract owners
• Savings potential can be high: many contracts are on “auto pilot” and analysis shows they deliver limited
value at high cost
8-20%
>$100K • Discuss with operational owners which vendors are top negotiation priorities
• Determine implications of significantly curtailing or eliminating support
• Ask vendors for SLAs that reflect value of service provided
5-15%
Long Tail <$100K • Decide during review whether to negotiate, send boiler plate letter or leave as is
• Operations owners responsible for negotiations
• Usually not much leverage exixts with vendor, so service level reductions or eliminating support are often
only way to reduce spend
3-12%
Figure 5: Example of arranging vendors into tiers and crafting negotiating strategies for each tier.
*Net cost of installed base

12. About the Authors
Ron Lev is a senior manager in Accenture’s
Technology consulting practice. He has
an extensive background in network
and video equipment sales to the MSO
market and is part of the AVS offering
team. Since joining Accenture, Ron has
taken a lead role in several strategic
sourcing and procurement engagements
within the MSO client space and acted
as a subject matter expert on others.
Vikrant Viniak is a senior manager in
Accenture’s Operations consulting
practice. He has an extensive background
in leading supply chain transformations
and driving the change that stems
from these initiatives. Vikrant is also
key member of the Value Based Deals
community of practice and has
actively led and participated in several
VBD initiatives at Accenture.
About Accenture
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