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It might seem counterintuitive to posit customer cost-cutting as a driver for the CLEC sector. But for small businesses purchasing basic phone and Internet access packages from incumbent providers, their remaining option to reduce costs is to switch to a lower-cost provider. Under pressure to minimize personnel expenses, some corporate technology departments have adopted more-complex services with higher per-unit costs in order to "do more with less," reducing total overhead. Many have delayed capital investments in hardware and software that are quickly obsolete and require constant maintenance in favor of temporary boosts to operating expenses like telecommunications services.

Businesses require secure, high-bandwidth low-latency communications services to share information and resources amongst employees as well as to back up data as stipulated by internal policies and external compliance

needs. The broadest impact has stemmed from regulatory requirements such as the Sarbanes-Oxley Act of 2002, which tightened oversight of companies' financial reporting, and the Health Insurance Portability and Accountability Act of 1996, which requires meticulous storage of healthcare data. Some pressures are driven simply by evolving market forces borne of technological advances. In the financial services vertical, for example, intense pressure to shave time off securities trading executions and other financial transactions—where microseconds can be worth millions—fosters demand for ultrahigh-performance communications services. Disaster recovery concerns have led enterprises also to distribute IT and storage resources around the country, or the globe in the case of multinationals. A growing number of companies record and warehouse all voice calls—made using VoIP—for possible use by

addition, debt and equity markets became less favorable, limiting carriers' access to capital and, in turn, their ability to upgrade infrastructure, develop new services, and scale their businesses to serve new customers.

Broad factors have also added to the downward pricing pressure already weighing on telecom services. Unable to create sustainable advantage through technology or economies of scale, many CLECs are locked into selling commodity services. One defense against commoditization is the offering of managed services such as data-hosting, business continuity services or consulting. But the window for such differentiation is narrow, as rivals are often capable of delivering similar value-adds - in some cases (e.g., large incumbents and major system integrators) on a larger scale.