Why bankruptcy doesn’t fix telecom woes

The latest spin on the recent spate of high-profile telecom bankruptcies is that it makes the industry as a whole more competitive by eliminating debt.

While I’ve got no dispute that shedding a crushing debt load is a positive thing, it’s not the whole answer. A huge – and still unresolved – problem with telecom providers is ongoing operational overhead.

Estimates vary, but most telecom providers place operational costs at 60% to 70% of their overall service delivery cost. That means the continuing drop in bandwidth prices does little to make providers more profitable.

Telecom executives say candidly that their current management and provisioning systems aren’t cutting it, particularly when it comes to the newer data services whose traffic volume continues to increase 15% to 25% annually, according to providers we’ve surveyed.

And the problem is systemic – not something that can be fixed with the right box or hardware package. As telecom services morph from analog voice to next-generation data services, the systems designed for supporting, provisioning and managing them need to undergo a comprehensive overhaul.

Financial analysts generally say the cleanest solution to this problem is bankruptcy. Eliminating debt ultimately frees up capital for hardware and software expenditures.

However, it’s not quite that simple. In many cases, the cost of updating outmoded systems is far greater than that of designing these systems from scratch. That means that even a debt-free provider that’s saddled with legacy systems (think post-bankruptcy WorldCom) is at a disadvantage compared with newer providers that lack the legacy overhead.

An analogy: Undergoing bankruptcy doesn’t turn US Airways into Southwest or JetBlue. Both these carriers have next-generation logistics systems that let them lower operational costs – systems that were built from the ground up and didn’t require expensive legacy upgrades.

US Air was built around the old models of the ’70s and ’80s, which are demonstrably less efficient than the newer approaches. Even a debt-free US Air will have difficulty matching the numbers of a company that’s designed from the get-go to operate at a higher level of efficiency.

The consequences for the telecom market is, first, in a scenario in which all other things are equal, newer service providers and those that already have invested heavily in newer data service models are better positioned than legacy players to survive over the long haul. That’s good news for, say, a post-Chapter 11 Yipes Enterprise Services. Companies such as AT&T that have moved to implement data-centric operational support systems also are better off than, say, the incumbent local exchange carriers, whose entire processes and systems still are geared to support nearly obsolete analog voice.

Second, IT professionals should have multiple back-up strategies – just in case. One positive outcome of WorldCom’s bankruptcy filing is that it opened everyone’s eyes to the dangers of overreliance on a single provider. That’s a good lesson to take to heart.