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The Truth Behind Commission Percentages

11/2/2016 12:32:27 PM Commissions

Choosing the right Inmate Calling Service (ICS) provider is more complicated than most jail or prison administrators think. When an ICS provider offers a large commission percentage, chances are there are also hidden fees and conditions. Don’t be fooled by the big numbers. It’s a decision that can lock a prison under contract with the wrong ICS provider for years; costing the facility thousands, or even millions of dollars in revenue.

For those reading who don’t know what an inmate calling system is, it’s basically a phone and/or videoconference system installed at a prison by an outside provider. Not only does the system allow inmates to keep in touch with loved ones, it also enables prison administrators to conduct, monitor and record conversations. The process is comparable to the concept of vending. A prison allows an ICS provider to come in and install its phone system, and in return, the provider offers the prison a percentage of net profit generated. Prisons use this extra income to cover costs, including those associated with transporting inmates, overseeing phone calls and administration.

How Commission Percentages Should Work

A contract between an ICS provider and a prison is supposed to be a partnership. Money is generated from inmate phone calls, the provider subtracts its cost of doing business, and then the leftover "pie" is split by an agreed amount. Here’s how deals are typically made:

Step 1. A prison in need of a phone system puts out a request for proposal and its requirements. 

Step 2. Bidding ICS providers package their deal, including a list of technology they can offer and the commission percentage they will give back to the prison from net revenue.

Step 3. The ICS provider that offers the most attractive deal will typically win the bid.

In the early 1990s, it was common for prisons to receive 20 percent of total net revenue of all phone calls. The division of revenue was fair, cut and dry. Everyone won. Only a handful of companies existed back then and contracts were simple. It was good business. Fast-forward a few years …

The Rise of Fees

Realizing the industry’s profitability, more ICS providers saturated the pay phone market into the 1990s, driving companies to increase commissions to win business. Providers also began offering bonuses— tons of cash. Some companies offered thousands and as much as a million dollars (with a large enough facility), extra equipment and perks just to sweeten and seal the deal. In the 2000s, competition in the inmate calling service industry reached a point of no return, the commissions that were being offered no longer made financial sense. There was only so much of a 100 percent, “pie” that could be given away. Providers had to think of something to make money, and what they came up with were fee structures. 

How Most Commission Percentages Actually Work

The implementation of fee structures changed the ICS industry, but it did so quietly and to the advantage of providers. Today, prison administrators who don’t understand ICS jargon and fine print do not realize that many providers are no longer paying the straightforward, across the board commissions they once did. A provider may offer a whopping 73% commission on phone calls and enticing bonuses, but chances are that’s not what the prisons are actually getting.

Providers are now charging additional fees on phone calls, which not only drives up costs for inmates to reach loved ones, but these fees are also non-commissionable. At the same time, many providers exclude certain types of phone calls. For example, commission may be earned on collect calls, but prepaid phone calls may be excluded. Here’s an illustration:

Let’s say a provider offers a prison 80 percent in commission but quietly excludes the fees it collects from phone calls.  If the prison generates $10,000 per month in revenue from phone calls, but it also generates $5,000 per month in fees, the total revenue for that prison is $15,000. However, fees are non-commissionable. This leaves the prison with 80 percent of $10,000 and not $15,000, which equates to 53 percent—not the 80 percent promised. Not to mention the types of phone calls that may have been excluded in calculating the prison’s share.

Unfortunately, providers do not openly disclose these loopholes during wheeling and dealing time. Most prison administrators today continue to sign contracts with ICS providers under the belief that commission percentages are still honest and transparent, but that simply is not the case. Furthermore, clever language is added into contracts regarding renewal and cancellation, forcing many prisons to stay with an unwanted provider for years on end.

Essentially, what these providers are doing is creating another “pie” for themselves.  They’ll give you part of pie one, but create fees— at the expense of inmates— to create a second, secret pie which they won’t share. This is just one of many games and tricks providers have created to gain more business and keep more money for themselves. 

New FCC Ruling

In an effort to make phone calls more affordable for inmates, the FCC has taken steps to limit this confusing pricing structure some ICS providers use by implementing rate caps. Steps have also been taken to close loopholes by barring most add-on fees imposed by Inmate Calling Service (ICS) providers, and set strict limits on the few fees that remain. This is good news for inmates, their family and friends, but prisons should be educated and aware of remaining loopholes that are still in effect.

The good news is there are still ICS providers out there who do not prescribe to these tactics and do not charge fees. However, it does take awareness and knowing the right questions to ask to make the most informed decision on behalf of the facility. At what point does the cost of administering a third party’s phone system outweigh its return? Before a prison signs a contract with an ICS provider, the offered commission percentage—and what it does and doesn’t include— should be made crystal clear.