Bankruptcies in telecoms put users on alert over contracts

Telecoms suppliers, ISPs and hosting companies have been having a hard time, reports Andy Favell. The trouble is, when they...

Telecoms suppliers, ISPs and hosting companies have been having a hard time, reports Andy Favell. The trouble is, when they suffer, everyone else in business suffers too

The number of financial failures among companies serving the telecommunications and Internet requirements of European businesses has been escalating for the past nine months.

They have ranged from broadband ISPs such as OnCue Telecommunications, through hosting companies CityReach International and Exodus Communications, to international carriers Storm Telecommunications, Viatel, Atlantic Telecom Group, Carrier1 and Global Crossing.

They were supplying services and products that companies have come to rely on to exploit the business opportunities of the Internet. And the sorry tale has yet to end. "I do expect more casualties, mergers and acquisitions," said Jill Finger, research manager for European telecoms services at analyst IDC.

In the danger zone are carriers selling only capacity; broadband ISPs hurt by incumbents' anti-competitive practices; and any carrier dependent on additional funding to survive.

"Insolvencies leave other carriers and corporate customers with little compensation and few legal rights, especially where network infrastructure and capacity has been provided on an IRU [indefeasible right of use] contract," said Andrew Moyle, senior partner at IT law firm Shaw Pittman.

The IRU is the crux of the industry's problems, explained Roy Howitt, regional channel director at network and managed hosting company Savvis. Many ISPs' networks are simply long-term IRU deals to use someone else's network, bought with borrowed cash when bandwidth was scarce. Today these deals are worth a fraction of the cost, but could bind an ISP to an unsound carrier.

The current climate means businesses must do their homework on potential and existing telecoms and network providers. Nowadays, many do not like what they find. For one client of London law firm Berwin Leighton Paisner, a wide area network project for 900 sites worth an eight-figure sum now hangs in the balance. "Our client conducted an analysis of the telecoms firms and came to the conclusion that all of the major players were equally risky," said senior lawyer Richard Chapman.

The worst case scenario is that your immediate provider becomes insolvent and services grind to a halt.

Beyond loss of business, financial implications could include both the cost of writing off the original contracts, buying a replacement and any associated costs of switching supplier.

Retrieving data or applications from hosted servers or storage may be difficult. Consider both the physical problems of getting into the building, removing data from a machine without power, and legal issues about rights to the data, application or URL.

The impact of the failure of a telecoms supplier depends on the nature of the business and any preventive steps the business or the provider had already taken. There is more to business continuity than just writing a plan, warns John Sharp, chief executive of the Business Continuity Institute. The viability of that plan must be tested routinely. Sharp is not convinced that many businesses understand this.

David Harrington, director- general of the Communications Management Association, said users should beware of some "flaky" telecoms firms in the market. However he has seen little evidence that his 2,000-plus members, who he claims are well versed in the issues of business continuity, have been switching suppliers.

Suppliers are desperate to win and retain customers. "It's a buyers' market," said Kevin Keith, vice-president and head of strategic research labs at Cap Gemini Ernst & Young Telecom Media Networks. This puts businesses in a good negotiating position and means you can demand that the supplier allays your fears up-front while you push for the best legal and business terms.

Pre-contractual demands should include a copy of the customer list with contacts. Seek assurances about financial stability; procedures for backing up data and services; ease of transferring your services to a replacement provider; and details of any third parties on whom the service is dependent. "Get them to prove that their business continuity strategy has been tested," said Sharp. If the supplier refuses to let you sit in on a test, demand to see the report of the last test. Without that proof, the service level agreements are not worth the paper they are written on, he said.

The smaller customers, with less bargaining power, can still vet the supplier by checking press and Internet bulletin boards, investing in credit-rating reports, and visiting the facility to count how many racks are full of customer equipment.

Insist that the contract includes back-up services; access to the facility; legal rights to the data, applications, hardware, specifications, phone numbers, urls and e-mail addresses; and flexible termination rights. "Many customers are now requesting (although not necessarily obtaining) exit provisions - termination rights from agreements based on their subjective view of the provider' and key suppliers' financial solvency," said Moyle.

One organisation that is covering its bases is the inter-banking network, Swift. It claims to have the right to revoke the contract and take back control of staff, facilities, and equipment outsourced to recently collapsed telecoms giant Global Crossing. Contingency plans should include re-negotiation of the supplier contract; introduction of redundancy in terms of a second telecoms supplier; diversity of routing; mirrored systems; and data back-up.

Ensure that everything is in place for a hasty move to a replacement provider, perhaps arranging a guarantee from the potential saviour.

Swift described its contingency planning as a "bit more paranoid than the others" but many telecoms customers expect that suitors will be quick to snap up stricken customers. This is often, though not always, the case, explained Keith.

Remember purchasers do not do this out of charity. Chapman reported that with one of his clients the purchaser of its beleaguered supplier held its customers to ransom demanding "huge increases" in price to continue providing a service.

Starting points
  • Business continuity week starts on 18 March. See www.thebci.org
  • The CMA runs seminars for its members. www.thecma.org
  • The Institute of Internal Auditors sells a guide to IT disaster recovery for £10 from www.iia.org.uk

  • Any complaints or concerns should be addressed to the telecoms regulator at www.oftel.gov.uk.

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