Self-protection

Reliance on financially troubled service providers requires special contract care.

Negotiating contracts with IT suppliers never has been easy, but with the economy in the dumps and IT vendors going out of business seemingly every day, contract negotiation has become even tougher.

IT managers must now take extra steps to ensure they don't lose their service, money or other corporate assets to a financially troubled partner.

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Negotiating contracts with IT suppliers never has been easy, but with the economy in the dumps and IT vendors going out of business seemingly every day, contract negotiation has become even tougher.

IT managers must now take extra steps to ensure they don't lose their service, money or other corporate assets to a financially troubled partner.

The basics

One obvious step users can take to protect themselves from service outages is to negotiate contracts with two or more vendors whenever possible. A company might give 60% of its telecom contract to AT&T and 40% to WorldCom. If one provider experiences an outage, the customer can switch traffic to the other provider.

But not all techies feel it's necessary to have multiple providers. William Horst, assistant regional administrator for the Government Services Administration (GSA) in Boston, says he feels confident that Verizon isn't going to fold.

Horst says the only thing that's changed in the GSA's contracts with the regional Bell operating company is negotiating for more physical redundancy at sites.

"Verizon has developed some expertise in that area over the past year," he says. "We were pleasantly surprised that they seemed to have their act together."

Brian Lane, assistant vice president for technology for the American Hospital Association in Chicago, also relies on an RBOC as the AHA's preferred telecom provider for its nearly 5,000 hospitals, healthcare systems and care providers. But in Lane's case, he uses Qwest, a company that has had a lot of observers questioning its financing and future.

Lane is confident Qwest will pull through. And even if Qwest doesn't make it, he doesn't feel a need to have back-up providers in place.

"When WorldCom went bankrupt, some people thought they'd go dead," he says. "But that hasn't happened at all."

WorldCom provides a good benchmark of what big business customers can expect from an IT supplier if it files for bankruptcy.

WorldCom's filing has affected contract negotiations in at least a couple of ways, says Hank Levine, a partner in Levine, Blaszak, Block and Boothby, a firm specializing in telecom contract negotiations.

In the past, if customers wanted to make an alteration to a contract, WorldCom might have said they couldn't make the change, because it didn't conform to the telecom tariffs or service guide, Levine says.

"Now they say they can't change it, because the creditor's committee won't let them," he says.

Very large telecom contracts might have to go before the creditor's committee, but it's highly unlikely that every contract will go before the committee, Levine says.

If a bankrupt provider tries to use this excuse on a user, the customer might want to push the issue.

Another way WorldCom's bankruptcy has affected contracts is that the carrier has tried to make new deals subject to possible rejection at a later date, Levine says.

When a company is preparing to leave bankruptcy, it has the right to assume or reject any end-user agreement it entered into before the company filed for Chapter 11.