Bracing for the storm

The costly disruption or slowdown of service because of financially strapped telecommunication providers is the latest major concern for companies.

"We talk about natural or financial disasters and don't necessarily distinguish between the two," eBay spokesman Kevin Pursglove said. "If the service ain't there, it ain't there. That's the bottom line. It doesn't matter why or how it happened. We just need contingency plans to take care of customers."

To prepare for the deluge, eBay beefed up its co-location facilities, spread out important applications such as e-mail on different servers, and found backup providers for Web hosting and other critical jobs.

It isn't the only company to equate telecommunication providers' crises with capricious acts of nature. Companies around the world are developing co-location facilities, interviewing backup vendors, bolstering wireless capabilities and adding emergency clauses to business contracts in wake of the accounting troubles gripping WorldCom.

WorldCom is $32 billion in debt and hovering near bankruptcy after announcing it had improperly booked $3.8 billion of operating expenses over the past five quarters. Now the Justice Department and the Securities and Exchange Commission are conducting investigations on the Clinton, Miss.-based company, whose assets include MCI, the No. 2 long-distance provider, and UUNet, a unit that carries the bulk of the Internet's traffic.

Even short of bankruptcy, which would dwarf Enron's and become the largest corporate failure ever, major changes to WorldCom's business could result in service disruptions--especially if no buyer steps forward for WorldCom's assets, analysts said. Although experts doubt that WorldCom, the No. 2 U.S. long-distance carrier, would shut down its network with a flip of a switch, they are warning customers to prepare backup plans.

"Although we do not expect any immediate cessation of WorldCom services, its financial straits along with the pending layoff of 28 percent of its work force will result in diminished service levels," according to a recent report from research firm Meta Group. "User organizations stuck with WorldCom agreements will struggle through the sell-off and dissolution period, experiencing problems including move, add, change and circuit installation delays, as well as unresolved trouble tickets."

WorldCom's woes cap more than a year of high-profile struggles among telecommunications providers. Bermuda-based Global Crossing, which filed for Chapter 11 bankruptcy protection in January, is being investigated for allegedly creating network-swapping agreements with some of its peers, improperly booking swaps as revenue and shredding related documents. Qwest Communications International began selling some assets in May, and in June the board of directors forced out CEO Joseph Nacchio. Federal securities regulators are investigating both companies.

Few players in the global telecommunication sector seem to be immune from negative earnings restatements and discoveries of accounting irregularities, and Wall Street is increasingly scrutinizing powerhouses such as Verizon Communications and SBC Communications. Michael Powell, chairman of the Federal Communications Commission, said this week that the industry was in a state of "utter crisis" and that he was bracing for more bad news.

The disgracing of vaunted names in the sector and talk of a broader meltdown has prompted a sense of imminent disaster at companies that rely on Internet, phone or wireless connections for revenue and employee productivity. The prospect of a telecommunications collapse now ranks as the most likely disaster to assail Corporate America, and executives have adopted a bunker mentality.

"Viewing the financial disasters as acts of God--it may seem extreme, but it's actually a very appropriate analogy and makes perfect sense to me," said Tom Jenkins, a telecommunications analyst and vice president at TeleChoice in Tulsa, Okla. "We know that the small providers are in trouble, but how much better off are the Sprints, Qwests and AT&Ts? It's not a matter of switching from one to the other; it's a matter of protecting yourself from everyone. You can't predict anything anymore."

Storm brewing in Europe
Executives' fears have escalated since May, when the pace of disintegration in the telecommunications sector picked up--particularly in Europe. Some experts say the continent's connectivity woes should serve as advanced warning for what could happen in the United States.

The situation appears dire for KPNQwest, a joint venture between Dutch national carrier KPN and Denver-based Qwest. Bankruptcy court trustees have until the end of the day Friday to find a buyer for Europe's largest fiber-optic network, which carries one-quarter of the region's Internet protocol data, or the remaining pieces of the network may be shut down.

KPNQwest declared bankruptcy in May, after its founders announced they would not invest more money into the joint venture. The network, which once spanned 18 countries from Finland to Portugal, has seen its market capitalization sink from $42 billion to about $4 million.

Court-appointed bankruptcy trustees want to sell the network in one chunk to maximize proceeds. But most potential bidders, including U.S. telecom giant AT&T, have backed out. It's unclear what will happen to the assets--or to Internet connectivity in Europe if the network is turned off.

Mid-week, a bulletin appeared on the KPNQwest site saying, "During this week you can already expect outages to happen that we cannot solve any more. At the end of this week we expect that larger parts of the network will be down."

Even though most have created elaborate backup plans in case of slowdowns or disruptions, European companies and divisions of foreign companies that rely on KPNQwest are approaching a state of panic, according to Vincent Rais, founder of European telecommunications consulting firm Rais Associates. According to documents filed with regulators and published on its Web site, KPNQwest international customers include Nokia, Dell Computer, Cable & Wireless Service's Exodus, Terra Lycos and National Semiconductor.

Executives in North America and Asia are also monitoring the situation for clues to what might happen in case of a similar outage of UUNet's Internet protocol services.

Eric Paulak of Gartner Research said in a recent research note that WorldCom customers' fate is "not as dire--yet" as the fate of KPNQwest customers, but WorldCom's plans to cut 17,000 workers will dent customer service and reliability of the network. Paulak issued bullet points for all WorldCom customers that don't already have extensive contingency plans:

• Don't sign contracts for long-term WorldCom services until its financial situation is clearer.

• Sign six-month extensions for expiring contracts.

• Duplicate and investigate alternative hosts for Web sites hosted by WorldCom or Digex.

• Evaluate how a second Internet service provider (ISP) might be used for Internet access and develop a virtual private network.

• Where there is no alternative ISP, order back-up dial-up ISDN (integrated services digital network) services for key locations.

Many companies have redundant systems or contracts with multiple providers--despite the cost--just to protect against this sort of problem. Internet service provider EarthLink, for example, buys network access from WorldCom, Sprint and Level 3 Communications.

A spokesman for Palo Alto, Calif.-based Hewlett-Packard said the computer giant wouldn't need to offer customers excuses--even though WorldCom supplies some voice and data services. The company's recent merger with Compaq Computer gave it two independent networks that offer some redundancy should one fail. It has also mapped out plans to redirect voice and data traffic to alternative service providers in case of a sudden WorldCom collapse.

"Certainly we've been monitoring the WorldCom situation, as everyone would expect," spokesman Arch Currid said. "We are prepared in the event that WorldCom discontinues its services."

Janis L. Gogan, assistant professor of computer information systems at Bentley College in Waltham, Mass., said companies must extend existing contingency plans to incorporate potential telecommunications troubles. Gogan, who also teaches e-commerce strategy at Harvard University, said most Internet-dependent companies bolstered emergency planning to prepare for the Y2K bug and again after the Sept. 11 terrorist attacks.

She said it would be unrealistic for e-commerce companies--particularly cash-strapped dot-coms--to have 100 percent redundancy to avoid any loss of service in case of an outage. She recommended that companies assess how much money would be lost during an outage--then determine how much they can afford to leave to chance.

E-commerce companies, which perform transactions and customer service online, lose anywhere from $1 million per hour to $1 million per minute when the power goes off, according to analyst estimates. In one high-profile outage, Seattle-based retailer Amazon.com suffered a series of disruptions during the Thanksgiving weekend in 2000. Investment firm Thomas Weisel Partners estimated that the one 20-minute outage deleted 20,000 product orders and $500,000 in revenue.

"Ask yourself, what are the consequences of being down for one hour, one day, one week?" Gogan said. "There really aren't many large companies in this country that would be OK if they were without Internet access for a week. But if you'd have a dramatic loss of revenue or productivity if access was down for one hour, you need a more elaborate plan."

"Get creative" with contingencies
Gogan also recommended reviewing the disaster plans for companies or divisions based in India and adopting them for use in the United States and Europe. Offices in India have relatively comprehensive emergency planning, she said, in part because of the higher incidence of weather storms and the country's less reliable power grid.

"If you don't already have a contingency plan, you should find one immediately," Gogan said. "It might help to get creative in where you look or how you pull it together."

Brian Turley, president of business continuity consulting firm Strohl Systems, recommended companies tap at least two alternatives to any telecommunications vendor they have or are considering.

"Establish relationships with those alternative companies and literally let them know that, if anything happens, you'll come calling," Turley said from his office in King of Prussia, Pa.

"Clients' sole concern is that their vendor has promised them service and it's not provided anymore. They don't want to hear, 'Hey, it's not my fault.'"

News.com's Troy Wolverton contributed to this report.