A Safer Bet for Buying Carrier Services

Telecom accounted for 10 percent of all public bankruptcy filings in 2001, according to PricewaterhouseCoopers. Now that WorldCom has made history by declaring the largest bankruptcy ever, you'd think the turmoil would be nearing an end. No such luck. Many bankrupt carriers, including Covad, XO and Yipes, are jumping right back into the game, so the market will continue to suffer well into 2003.

As vendors re-emerge, they're talking up the rejuvenative effects of bankruptcy as if it were a trip to the health spa. "We came out further ahead than I expected," said Covad's Charles McMinn when that company re-emerged in February. And as Yipes reared its head after an asset sale in July, analysts who should have known better participated in a public gushfest over the company's prospects.

Meanwhile, carriers are desperately trying to win customers back by allowing short-term agreements and waiving early-termination charges -- some are even offering free services in exchange for your show of renewed faith.

Bankruptcy is simply not healthy for carriers or their customers. Twenty-eight percent of business reorganization plans fail, according to a UCLA study soon to be published in the Vanderbilt Law Review. In some states the rate is much higher -- Delaware, for instance, has an astronomical failure rate of 54 percent. And considering the number of telecom bankruptcies under way, the failure rate is only going to climb. The UCLA study says industries with the least chance of success are those that are distressed, are highly competitive and have hostile investors. Ring any bells?

And as that Global Crossing customer discovered, most services don't shut down suddenly. Instead, quality declines gradually: Circuit-installation targets get missed. Outages become longer and more frequent. Billing gets out of whack. And multiple services sometimes go down simultaneously. Recently a large customer of a "financially healthy" carrier lost its voice, data and Internet services in one fell swoop, despite its having diverse access routing to these services. A single cross-connect deep in the carrier network had taken down a regional PoP, and the rest is history. With carriers trying to deliver more with less, look out below.So, clearly, customers need a new buying strategy. Signing up with a single carrier just won't do. The only potential solution is to protect yourself by diversifying, or to set your expectations very low. Ask your business leaders if they prefer rock-bottom pricing or rock-solid stability -- they can't have both.

Of course, you'll pay more for reliability because you'll lose your volume discount and spend more on contract administration. But even if you don't need redundancy everywhere, at least protect your critical links by using multiple carriers, and shun managed services that tie you into a single transport provider. Also, avoid contracts that base discounts on large revenue commitments, unless you are certain you can meet the spending targets.

The telecom shakeout will ultimately create a stabler market, so the faster we can get the hopeless companies out of the mix the better. The question is, will carriers -- and their investors -- also take the long view and focus on delivering strategic value? Time will tell. Until then, shop wisely and prepare for the worst.