There is a parallel social contract between telecommunication systems manufacturers and its customers. To understand the social contract for a technical (IT leader) or economic (CFO) buyer of telecommunication equipment consider the following:

• The manufacturer invests billions of dollars in software and hardware R & D and sells the systems below the true cost of developing, selling and installation. The general economics are that most new systems are sold at a loss in order to gain the longer term, more profitable relationship of an overpriced, manufacture -based maintenance contract.
• The break-even period is about three and a half years. In other words, it takes two and a half years AFTER the warranty period for the manufacturer to break-even on the equipment sale.
• Most technical and economic decision makers agree to continue paying for manufacturer-based maintenance because the maintenance contract pays for ongoing enhancements, typically in the form of tactical software service patches.
• The social contract is formed when you agree to over pay for high margin maintenance because your company might benefit from ongoing R & D performed by the manufacturer. The parallel is that you give up some personal liberty (how to more frugally obtain telecom maintenance) in return for protection of your telecom asset.

The parallel to Locke’s social contract is that your company can always invest in new technology from your current telecom solution provider, whether you continue to be a maintenance customer or not. Most manufacturers reward loyal customers with upgrade incentives. Often times you can do just as well, or better, through savvy procurement techniques.

SO WHAT?

The question for the reader is this: Are you 5+ years past the warranty period on your telecom platform? If so, this may or may not make economic sense. Below is a case for each:

1. Makes Economic Sense: Your telecom solutions partner continues to be delivering value-added enhancements on your current platform. You are unlikely to move to a different telecom solutions provider. Therefore, it makes sense to continue funding ongoing development into your current and future product set by voluntarily paying a premium for a manufacture-based maintenance Contract.

2. Does not make Economic Sense: Your current platform is dead-ended. The last service patch was installed 4 years ago. No further enhancements are being made. You are therefore funding the manufacturers’ R & D with no benefit likely to be realized by your firm, especially if your plans are to move to an entirely new platform. You may even be funding your competitor’s competitive edge, to take this line of reasoning another step.

Conclusion:

The traditional default decision to play nice with the telecom manufacturer in terms of investing in a solid telecom solutions platform and remaining on manufacturer-based maintenance needs to be closely scrutinized, especially in today’s market. Maintenance contracts are the cash cows for telecom solutions providers. Your firm benefits in the long run if you have access to more economical future patch releases. But, if you are living on borrowed time in terms of extending the life of your PBX and call center platforms, a strong business case can be made that you should divert the premium maintenance fees being paid in to a savings account for the telecom platform in your future.

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