Megatrade: A Sharing Group for the Twenty-First Century

Shared telecom purchasing brings lower prices, better service to securities industryThe notion of a sharing group, an alliance expressly for the purpose of negotiating group discounts from telecom suppliers, would seem to make a great deal of sense to telecom users. Each member saves on its telecom services costs because the group can negotiate larger discounts than members can on their own. And the organization administering the group takes on the burden of supplier management. Sharing groups played a role in the evolution of long distance competition. The tariffs regulating the telcos’ LD service permitted them to sell at reduced prices to sharing groups. But when LD service was deregulated and prices plummeted, sharing groups disappeared from view. Yet Canada still has a large, long-established and successful sharing group—Megatrade, which serves the securities industry and some other financial companies. Its primary concern is data networking, not long distance. And it recently won an important regulatory battle over its right to exist. Unique ExampleTo our knowledge, Megatrade is Canada’s only pure sharing group, in the sense that it exists solely to negotiate group rates for members and to manage the relationship with carriers. There are other examples of group buying—universities and colleges in Quebec, for example. But the main business of the Réseau informatique scientifique de Québec (RISQ), which negotiates group rates for Internet services on behalf of members, is to manage a broadband wide area network linking research institutes. Megatrade, by contrast, neither owns nor manages infrastructure. Is Megatrade a model that could be emulated by other groups? To find out, we spoke to Megatrade and its principal current supplier partner, Bell Canada. Historical circumstances and the structure of the securities industry itself go some way toward explaining why sharing has flourished there and not elsewhere. What is not clear, however, is whether these factors are essential prerequisites. Megatrade, established in 1989, has about 120 members. They include banks, brokerage firms, information vendors, exchanges, clearing and settlement organizations and mutual fund companies, ranging in size from very large to small. Forty percent of the members are located outside Canada. Many of the foreign members are in the U.S., but some are overseas. Members pay a "nominal administration fee that covers the reasonable costs" of running the group, says Barbara Boznar, Megatrade’s director of operations. "Megatrade is a not-for-profit non-share-capital corporation," she explains. "There is no fee to join. There is a qualifying process that is fairly confidential, but in a nutshell, have to be involved in the financial industry and they have to meet certain benchmarks to qualify. All the discounts are passed back to members." The company provides connectivity for quote machines on brokers’ and advisors’ desktops, private voice networks for bond and foreign exchange trading, data connectivity for electronic trading systems and local and wide area network services in financial institutions. These services have historically required the provision of dedicated private lines, but Megatrade is now in the middle of a major initiative to help members make the transition to IP services. The company also provides a 24x7x365 help desk as well as customer service and a single bill for all services. Members have a single point of contact. "That’s one of the great advantages," Boznar says. "They don’t have to find their way around in the carrier organizations." Megatrade has a contract with Bell Canada for provisioning most of the services it provides in Canada. It also has relationships with third-party suppliers of ancillary services in this country and with other carriers outside Canada. Bell has been the partner of choice for much of the group’s history and often renegotiates its previous contract. "It could go out for public bid," Boznar says. "It depends on the advice of members. It has in the past gone out for bid in the early stages and it has been won by another company, but in the last several contracts it has been Bell that was felt to provide the best value for the group." IP MigrationOn dedicated private line services, Megatrade prices are about 29% to 70% less than retail rates, she says, depending on the route and utilization. The retail rate is not necessarily the lowest a company could negotiate on its own. Still, these are significant savings. Cost savings on IP services are less clear-cut "because IP is just unfolding," Boznar says. Greg Zamarski, the Bell associate director responsible for Megatrade, estimates that discounts on Level 2 and 3 IP services will probably be about 18% to 25% compared to leased lines. "As time goes by and as more folks migrate to IP, percentage discounts will rise," he says. Megatrade has had to strike a balance in negotiations recently in order to avoid penalizing members who are late adopters of IP. The communications services Megatrade provides are absolutely strategic for most of its members, even more so in recent years since the industry has gone to electronic trading. The discounts tend to level the playing field between small, medium, and large players, all of whom enjoy the same level of service at a similar price. "For companies in the financial industry, communications is one of their largest costs," Boznar says. "So when they can leverage huge discounts like this, it’s obviously to their advantage." Zamarski adds that it’s also vital for Canadian companies to get the best price possible on telecom services because businesses increasingly need to compete globally. Membership GrowthHow successful has Megatrade been? Boznar says membership continues to grow. She believes the transition to IP, projected to take about three years, will open up an even larger market of smaller firms that are currently using retail ISP services. The company’s president, Ian Russell, sounds a note of caution. One reason for the decline of sharing groups in general, he says, is that with greater competition, telecom services have become increasingly commoditized. Customer ServiceMegatrade, however, does not rely entirely on discounted prices to maintain member loyalty. Customer service is a key differentiator. Members in effect outsource provisioning, as well as the service itself, to Megatrade. They have dedicated support agents at Megatrade who know their networks, know the securities industry, and often have backgrounds both in telecom and securities. The company has focused for years on providing superior customer service, Boznar says. "Our staff have been trained to take customer service to a new level," she says. The Megatrade Help Desk is so good that Bell has contracted its services to provide support to Bell’s institutional customers in the industry. And in a Bell survey of New York City securities industry clients recently, Megatrade’s customer service group was rated the best across North America, Zamarski says. Megatrade also offers better service level agreements (SLAs) than members could get on their own, Boznar says. For example, where standard SLAs specify the supplier must respond to trouble calls within four hours, it’s 2.8 hours at Megatrade. And if the supplier fails to meet the terms of the SLA, there are financial penalties. Provisioning times for circuits are also lower than the standard—8 to 15 business days depending on type of circuit, with T-1s taking no more than 12 days in Ontario and 15 elsewhere. Another key benefit Megatrade offers is one-vendor billing, provided by a new billing platform the company developed at considerable cost and effort. Members receive one bill from Megatrade, no matter how many different services they use. And in the IP environment, there are many services to be accommodated. The new billing system also provides more detail, making it easier for members to charge back costs within their own organizations. "The billing platform was a huge accomplishment for Megatrade," Zamarski says. A Threat to SurvivalDespite its many achievements, Megatrade’s survival was recently put in question by an initiative in an unexpected quarter—the CRTC. A proposed CRTC order, which the regulator first broached in Telecom CRTC Public Notice 2003-10, would have introduced strict "floor pricing." Telecom suppliers would not be able to offer discounts higher than 10% off their published rates. The proposal met with almost universal opposition. The CRTC’s recent Telecom Decision CRTC 2005-27, while not renouncing the proposal, did back off from its implementation. It was a good thing for Megatrade that it did. "We have a contract with Bell going through a number of years," Russell says. " would have overturned that contract, which represents about $14 million a year in cost savings for our members. For the life of us, we can’t understand why the CRTC would want to prevent users from benefiting from that." The CRTC, to its credit, was looking for ways to prevent carriers in the retail market from using predatory discounting to drive out smaller competitors. But Russell charges that the regulator has misunderstood the market—again. It’s not entirely coincidence that Russell is also chairman of the Coalition for Competitive Telecommunications. The coalition has been a vigorous critic of CRTC policy in general and of the floor pricing regulation in particular. (See box on page 5) According to Coalition counsel Phil Rogers, an Ottawa partner in the law firm of Osler, Hoskin & Harcourt LLP, it is unlikely the commission will come back with a revised floor-price order, but not impossible that the basic floor-price mechanism might surface in some other proposal down the road. Regulatory BlowFloor pricing would probably have put Megatrade out of business, and the threat of it would clearly deter any other group from trying to emulate Megatrade. This would not be the first time CRTC policy has inadvertently or otherwise diminished the attractiveness of sharing groups. In 1994, competitive service providers complained that they didn’t have an equal shot at sharing-group business because, in at least some cases, the groups were administered by the carriers. CRTC order 95-520 stipulated that sharing groups must be administered by not-for-profit entities independent of the carriers. Boznar says 95-520 put the nail in the coffin of at least two existing sharing groups, one in the insurance industry, one in government, which were administered by Bell. Megatrade survived because it was initially part of the Investment Dealers Association of Canada (of which Russell is a senior vice-president) and later of the Toronto Stock Exchange, then a not-for-profit organization supported by industry members. The TSE later spun off Megatrade as a not-for-profit corporation to administer the sharing group. Barriers to SharingOne barrier for others looking to form a sharing group, Boznar suggests, is the considerable effort and resources required to set up a fairly sophisticated entity to administer it, with no expectation of its making a profit. Zamarski notes also that few other industries have the incentives the securities industry does. Its members rely heavily on electronic interconnection to do business, and there is a long history of inter-firm co-operation—stock exchanges, until recently, being the other prime example. So there are disincentives to forming sharing groups. Incentives also may be lacking, because in an era of telecom commoditization the discounts a sharing group can negotiate are not much better in some cases than companies—especially large ones—can get on their own. Throw in the absence of a culture of co-operation in many industries, and it becomes clear why sharing groups are now so rare. That said, it’s clearly not impossible to form a sharing group. Megatrade is living proof. On the other hand, if you’re in the financial industry, you don’t need to form one. You can join Megatrade. User Coalition Intervenes to Defend Price FlexibilityWhen the Canadian Business Telecommunications Association folded in 1999, it left business telecom users with no collective voice in regulatory proceedings. This lack had a visible impact on business telephony—for example, as a factor in the CRTC’s long delay in acting on the need for wireless number portability. The Coalition for Competitive Telecommunications (www.telecomcoalition.ca/) was established in September 2003 in part to fill this void. Most coalition members are industry associations representing mainly large companies. The Coalition is also trying to attract individual companies. "Our main mandate is to ensure that the interests of the business community are well served in the area of telecom policy," explains chairman Ian Russell. "Most of the positions we have taken in regard to regulation so far have been fairly laissez-faire, because the telecommunications market for the business sector is competitive." Indeed, the coalition often makes common cause with carriers, although carriers are not allowed to be members. This has put it on a collision course with the CRTC on more than one issue. For example, the Coalition has spoken out vigorously against the CRTC decision to keep VoIP services within the local phone service regulatory framework. The Coalition intervened strongly against the CRTC’s 2003 proposal to constrain the ability of regulated carriers to provide term and volume discounts. The Coalition pointed out that this measure "would have prevented prices from falling to the levels where they otherwise would have gone" and disallowed a term and discount structure "that is the normal procedure in the business community," says Coalition counsel Phil Rogers. "The Commission’s proposal raised undoing existing contracts, with retroactive effect," including those of Megatrade, whose business depends entirely on such contracts, Rogers says. The CRTC shelved its proposal, thanks in part to the Coalition’s forceful submission. But Coalition members are holding their collective breath to see if the regulator might try again to introduce a strict limit on price discounting. Any such order would result in significant additional telecom costs for many business users. "It’s still under consideration," Russell warns. "We haven’t put a stake in its heart yet."

Megatrade: A Sharing Group for the Twenty-First Century

News | August 25, 2005

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