Dealing With Financially Ailing Telecom Providers And Vendors

RFG believes enterprises will continue to encounter problems related to telecom products and services that affect the availability and reliability of business applications, because of the growing number of financially strapped telecom providers and vendors. IT executives should review contractual guarantees versus achieved performance, as well as the financial condition of key service providers, and initiate immediate actions against those companies that represent considerable enterprise risk.

Business Imperatives:

• 2002 continues as a turbulent year for telecom service providers and product vendors. Global Crossing, Lucent Technologies, Nortel Networks, WorldCom and others continue to undertake desperate measures to return to profitability. IT executives should review key telecom vendor service level agreements (SLAs) and/or performances guarantees to verify compliance with contractual requirements, and take appropriate actions as required.
• Dealing with financially strapped companies requires proactive action to prevent service levels from a rapid deterioration that places the enterprise telecom infrastructure at risk.

Critical business applications must be identified, as must those products and services required to support them. IT executives should require vigilant monitoring for all the components of each business-critical application, and prepare backup strategies for services and/or products that create high risk because of vendor financial conditions or unacceptable performance.

Telecom service provider and product vendor capital spending hit its apex in 1999 and 2000, and many of these companies have announced heavy losses and extensive layoffs throughout the last eighteen months. In addition, service provider network upgrades, which typically occur every two or three years, are falling behind schedule, resulting in possibly significant network performance degradation.

While both telecom providers and application service providers (ASPs) continue to suffer through difficult financial times, this Note is focused on the telecom market segment. RFG believes the financial havoc wreaked upon the telecom market during the past eighteen months means that enterprises should exercise prudence and due diligence when engaging in any of the following activities, especially with major suppliers:

• dealing with current contractual breaches and/or performance issues
• negotiating new telecom product and/or services contracts;
• prematurely terminating contracts from non-performing vendors without demonstrable backup;
• renewing or extending contracts for existing products and services; or
• some combination of the above.

Although selecting service providers or product vendors has never been a slam-dunk, the growing number of financially ailing companies certainly makes these choices more difficult. In today’s volatile environment, an incorrect vendor choice or a failure to negotiate enforceable enterprise compliant SLAs and contract terms could pave the way to business disaster and employment termination for the responsible IT executives. Consequently, IT executives should consider the following questions for both incumbent and new contract negotiations.

• Is there a services/product backup plan available if the company fails financially?
• Should enterprise business be split between multiple vendors, even though overall prices could be higher?
• What legal recourse is available in the event of a failure or continuous poor performance?
• What contract term period is best for the enterprise’s business objectives?

Based on the current telecom environment, RFG believes shorter-term contracts with effective and enforceable SLAs should be a primary enterprise focus, and splitting critical enterprise telecom business among several vendors should be considered. IT executives should also consider vendor bankruptcy possibilities. Unfortunately, once a company enters Chapter 11, enterprises have little recourse except to find an alternative vendor or provider. The process of moving services or finding new product sources could easily take several months or more without a well-crafted backup plan. IT executives should confirm they have alternative choices available and are not caught off-guard.

Moreover, a cash shortage continues to affect telecom vendor customer support organizations, delay product development schedules, and impede the build-out of network infrastructures and services. The customers of seemingly unstoppable telecom giants Global Crossing, KPNQwest, and WorldCom, and those of high-flying technology companies such as Covad Communications and Yipes Communications, now find themselves in precarious and difficult straits.

Now more than ever, enforceable SLAs and contractual performance guarantees that run the gamut from guaranteed installation times to network latency are a business imperative. IT executives should reassess all SLAs or performance level guarantees from vendors that provide business critical services and take appropriate action as required to ensure the enterprise gets what it pays for. If a telcom company is unwilling to provide an effective SLA or any written performance guarantees, IT executives should promptly eliminate them as a viable supplier.

Even during the current state of vendor unpredictability and financial instability, there are tangible actions enterprises can employ to help ensure they receive reliable and contract-compliant services. The following list represents some suggested actions enterprises should consider in the event of non-performance or an SLA violation situation.

• Escalate all critical problems to the vendor or service providers’ executive management and follow-up all conversations in writing.
• If the contract is near expiration and the service is not satisfactory, provide written notice to the provider or vendor that the contract will not be renewed and why.
• Immediately explore alternative supply sources for business critical services or products that fail to meet enterprise requirements.
• Provide written notice to the vendor of the violation and request a senior level executive meeting within 10 working days.
• Verify penalties for a “failure to perform” are clearly understood and take appropriate actions as required.

The above tactics, although valuable, are somewhat reactionary and cannot prevent problems from occurring in the first place. Dealing with financially strapped vendors requires ongoing, proactive actions to prevent service levels from deteriorating rapidly and generating excessive levels of customer dissatisfaction.

IT executives should also conduct monthly performance review meetings with major vendors and service providers to analyze financial conditions, review achieved versus guaranteed performance, and discuss backup strategies. These meetings should be considered as important activities to help protect enterprises from unpredictable situations that impact network performance and prevent reliable user access to business applications.

Finally, IT executives should verify that all business important applications are identified and categorized according to their criticality. Business application profiles (BAPs) or their equivalents should be developed and/or enhanced to identify all IT and network elements involved in the delivery path of each specific application. BAPs should also include backup plans that assure continuous, reliable end-to-end service delivery in the event of a failure.

Likewise, BAPs should identify the availability and reliability requirements that must be maintained to keep business applications running and user accessible. IT executives should periodically test all telecom backup procedures to validate they work as planned, are operationally acceptable, and are fully capable of performing the required tasks. Traditional and emerging vendors alike are delivering solutions to aid in the determination of end-to-end application performance, and in the monitoring of IT and network performance levels for compliance with SLAs and other service guarantees.

RFG believes enterprises must now be prepared to deal with financially ailing service providers and vendors, and that proactive performance monitoring and backup contingency planning are essential survival tools. IT executives should establish a framework capable of monitoring the performance of all major service providers and vendors and consider splitting telecom business between various suppliers to mitigate business risks.