Telecom Hang-UpsTelecom Hang-Ups

By now, Jeff Chasney had expected to have 3,200 Carl's Jr. and Hardee's restaurants connected via high-speed links to the data network of parent CKE Restaurants Inc. The restaurant holding company planned to use the connections for fast credit-card transactions, real-time financial reporting, and Web-based video surveillance in its eateries. But CIO Chasney had to put those plans on hold because telecommunications companies stalled the rollout of new services he wanted to use. When he looked for alternatives, he saw an unstable telecom industry -- 24 of the top 30 national carriers have gone bankrupt in the past two years.

"I'm waiting for the dust to settle," says Chasney, whose nationwide voice and data contract with Sprint Corp. is up for renewal this year. "We're going to consider everyone out there. But we're going to scrutinize their financials to make sure they're well-managed and can sustain further degradation of the economy."

Many other business-technology managers also plan to take a closer look at their telecom service providers. More than $10 billion in business telecom contracts are up for renewal this year, according to analysts and lawyers who help negotiate those deals, and customers want to make sure the suppliers they select will be around until the end of the contract. Businesses are conducting more exhaustive research on the financial health of potential providers, examining everything from net cash flow to capital investment to bond ratings. "A few years ago, this absolutely wasn't an issue," Chasney says. "Now, it's absolutely paramount."

Kirk Gutmann, General Motors Corp.'s information officer for global product development and service, agrees. The automaker, which spends more than $100 million a year on telecom services, is watching WorldCom and AT&T, its primary carrier, he says. "We've always watched balance sheets and performance as part of our strategy, but now there's a broader group of people within GM looking with us," Gutmann says.

Which carriers will survive still isn't clear. On the positive side, the industry turmoil provides opportunities for executives to negotiate good prices for bandwidth and services from carriers hungry for new customers or desperate to keep existing ones. But IT managers also must protect themselves in case carriers' financial problems cause a decline in service quality or a slowdown in the deployment of new services.

CKE's Chasney has been happy with the frame relay, DS-3 leased-line, and voice services he gets from Sprint. Still, this year he may contract with two carriers (Sprint and another, or two new vendors) to reduce risk and be in a better position to take advantage of new services that could help CKE reach its goals. "Anyone signing a telecom contract now isn't buying for the services there today," he says. "They're buying for the future."

So far, the financial problems in the industry haven't hurt network performance or reliability; there haven't been any major network outages in the past year. GM hasn't seen any deterioration of services because of WorldCom's bankruptcy, Gutmann says.

Yet business-technology execs coming to the negotiating table in 2003 should demand clauses in their contracts that afford them better protection against events that might cause service disruptions or other serious problems.

For instance, because customers can't cancel contracts once a carrier is protected under bankruptcy laws, companies should demand the option to reduce traffic commitments if a carrier shows signs of financial trouble, based on parameters such as bond ratings, says Hank Levine, partner with law firm Levine, Blaszak, Block, and Boothby LLP. The firm negotiates business telecom contracts and represents WorldCom customers in the bankruptcy proceedings.

Levine also recommends companies start by committing no more than 60% of their total traffic to long-term contracts, and that they split it among multiple carriers. The remaining 40% can be allocated, quarterly or annually, to the most deserving carrier. In healthier days, businesses routinely committed about 80% of their total traffic.

Another key change in negotiations is to remove hiring clauses. Until now, service providers and their customers agreed under contract not to hire each other's employees. But in the event of a service-provider bankruptcy, businesses should reserve the right to hire the telecom experts who are dedicated to their accounts.

It's more important, however, to have backup plans. Although it's unlikely, a carrier in bankruptcy can opt to cancel a contract and discontinue service with only 30 days' notice. WorldCom, for instance, refuses to guarantee that it won't cut off service to its customers. "Scores of enterprise customers have 90% of their business committed to them," Levine says. Consequently, "everyone is either moving off WorldCom or getting significant backup," he says. Frank Grillo, Worldcom's senior VP of business marketing, says it's preposterous to think the carrier would disconnect customers, although he admits that Worldcom hasn't guaranteed that it won't do so. "It's just part of the bankruptcy process," he says.

But Levine says companies must be prepared for any emergency. "It takes six months to move a big network. Without a backup plan, you could find yourself literally out of business." Businesses should install access lines from two carriers into each of their 10 largest sites. "That's $3,000 a month. It's cheap insurance," he says.

Companies whose contracts aren't up for renewal sometimes find they don't have the leverage to demand better service. "We continue to be frustrated getting new sites up and running," says Maritz Travel Co. CIO Richard Spradling, whose contracts with AT&T, Sprint, and WorldCom don't expire until 2004. "Deadlines are missed often," he says. And carriers have increased the workload on their account teams in the last year, so service is suffering.

Richard Tisdale, Petro Stopping Centers' CIO, hopes to find a telecom vendor that puts customer service ahead of petty infighting. Two years ago, he had to go to a reseller to get a single contract for pay phones, Internet kiosks, a frame relay data network, and voice services for Petro's 58 truck stops and 36 corporate locations. AT&T couldn't do that. It "brought people in from the different divisions, and they argued about who was going to get what revenue," Tisdale says. He's begun talking to AT&T, Sprint, and others about his needs when his contract expires next year.

Not that he's without reservations about the stability of the telecom industry or free of cynicism about business in general. "I've got a pretty good idea that AT&T and Sprint will be around," he says. "But either one could Enron on me tomorrow, and it wouldn't shock me."

Photo by Sian Kennedy