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News Analysis
Nov 04, 20026 mins
Data Center

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.

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.

A company can reject a contract it got into before bankruptcy, Levine says. But a contract signed after a company has filed for bankruptcy must be honored.

WorldCom has tried to slip language into new contracts, renewals and extensions that would make all the new agreements subject to rejection, Levine says.

“If you’re signing a new deal with a provider in bankruptcy, one of the first things you want to make sure of is that it is a post-petition agreement, so it can’t be rejected,” he says.

Hosting pitfalls

IT managers outsourcing their Web hosting or applications hosting face serious problems from bankrupt suppliers.

If a company’s data or voice provider goes under, the company can have back-up providers in place and quickly switch service to the back-up provider.

Setting up a back-up application service provider (ASP) or hosting provider is more difficult and in some cases might not be possible.

There are two obvious issues when an ASP turns off the lights, says James Kalyvas, chair of the e-business and IT practice at Chicago law firm Foley & Laudner.

The first is how a user company keeps operating.

The second is how the user company recovers the information it needs from its ASP or hosting provider.

For a company to get back up and running if its ASP goes down, all it really can do is have some kind of back-up plan in place, Kalyvas says. A company could have a secondary provider in mind to which the company could shift quickly in the event of an emergency.

To make sure a company has all the information it needs to keep running, regular data backups to an off-site facility are probably a good idea, Kalyvas says.

You can also have an ASP place the latest versions of the software it hosts in the hands of a third party, possibly even another ASP. If something happens to the primary ASP, you can access any required application.

A final point: ASP customers must ensure that any contract specifies that the customer owns any information the ASP might be storing for the customer.

“Almost all ASPs will look to create some business out of the data they collect,” Kalyvas says. “You want to be sure you’re not giving them any sensitive information.”

Tricks of the trade

Here are some ways companies can save money and protect themselves when negotiating contracts:

1. Two vendors are better than one.

Splitting a contract between multiple vendors assures a backup if one vendor experiences a service outage or goes out of business. You also force the vendors to compete with one another.

2. Keep an up-to-date qualified vendor list.

With a large number of vendors going out of business, make sure to keep your information as current as possible.

3. Commit as little as possible to any one vendor.

If, for example, your annual telecom budget is $6 million, try not to commit more than $3 million to a vendor, so you don’t get locked into a contract if better options become available.

4. Make sure you hear “no” from a vendor.

The more “no’s” you get the better. It means you’re pushing for the best deal possible.