C&W US Clients Face Uncertain Future
Posted October 9, 2009 by Bierce & Kenerson, P.C. · 
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By Ed Agar, primesourcingadvisors.com
October 27, 2003 – The drama surrounding Cable and Wireless’ US hosting business remains an unresolved story for its approximately 1,500 clients. Since declaring its intention to exit the U.S. market in early summer, C&W has yet to deliver a clear update with regard to its business direction. C&W seems to be avoiding the inevitable.
Fundamentally, C&W was viewed to have two alternatives: sell the assets and existing contracts to an interested suitor, or declare bankruptcy. Andrew Schroepfer, founder and President of IT Infrastructure research firm Tier 1 Research (tier1research.com), says there may be a third hybrid option on the table. “We believe there is a buyer at the table for some of the marginally profitable data centers and the customer base where C&W would pay the costs to close down some of the other sites. Such an option would save C&W from the bankruptcy issues and save it several hundred millions of dollars from the option to pay to merely close the entire business.”
Most customers of the firm appear to have remained loyal thus far, which confuses Danny E. Stroud, former CEO of managed hosting firm AppliedTheory. “I don’t understand why CIOs, COOs and in-house counsel are not heads-down working on alternative service strategies – why executives are subjecting their valuable IT assets to significant risk exposure is irrational,” he says. “Since the financial shakedown of the last couple of years, there are now many quality providers. Further, with the availability of hosting vendor rankings like the PrimeSourcing Index there is a multitude of data to help buyers make informed decisions.”
The ‘wait and see’ attitude of C&W customers may be attributed to two factors: 1) customers have remained loyal due to renegotiated flexible terms and distressed pricing offers, and 2) transition efforts to a new provider are time consuming, costly, and rife with execution risks for resource-strapped IT departments.
Outsourcing lawyer Bill Bierce of Bierce&Kenerson PC and publisher of outsourcing-law.com (outsourcing-law.com), thinks current customer indifference is a highly risky approach. He recommends that CIOs review their agreements for termination and transition rights in case of bankruptcy. Should C&W opt for bankruptcy and the sheriff padlock the front doors, customers may be facing some nasty surprises:
- Assets could be locked down, forcing customers to petition the court to move their assets out. It would be expected that IT assets would be frozen a period from several days to several weeks, which is longer than the period of the typical disaster recovery service contingency plan.
- Bankruptcy could deprive C&W of the flexibility to service its customers in compliance with service level agreements. For managed services, the bankruptcy courts have the right to terminate executory contracts and not pay damages for wrongful termination.
- Customers may need to get a license to continue to use software licensed by C&W. The US Bankruptcy Code allows the bankrupt service provider to terminate a service but does not require it to allow the user to get access to any software that was used in providing the service.
- Where a bankrupt managed service provider abuses its credit lines with its own suppliers, paying customers have no assurances that funds will flow downstream to subcontracted suppliers or even if subcontractors will be retained by the bankruptcy courts. As the cash cycle stops, the services may stop, too.
How C&W will respond to its obligations will be played out in the coming months. The experience of Exdous, Intel Online Services, WiTel, MFN, PSInet, Genuity, Northpoint, Rhythms, Network Plus, Winstar and others exiting the data center market has been mixed. In some situations, there have been documented examples of looting, destruction of property, stranded customers, and total withdrawal of services accompanying a dark data center. “Some customers were forced to take extraordinary steps under duress to insure service continuity, while other customers sustained revenue loss and productivity hits,” Stroud says. “Further, costs and performance degradation during a hasty transition to a new provider are generally significant.”
Stan Lepeak, VP of Meta Group Inc. (metagroup.com), a research firm, says the best hope for customers “is a prepackaged bankruptcy that allows the customer relationship to be bought by a ‘white knight’ with the court’s blessing. This process allows the shedding of liabilities.” There must be reasons why suitors have not already grabbed C&W’s US assets for pennies on the dollar. In simple terms, this would seem to indicate the business does not appear to be salvageable and that a clean buyout seems unlikely.
Given the above scenarios, it is recommended that prudent executives start to invoke contingency plans. According to Schroepfer, “aside from acknowledging that avoiding a migration is a good thing, we would move our own operations out of C&W if we were there.”
It is recommended that exit strategies be planned with the assistance of independent hosting consultants and specialized attorneys. Such trusted advisors are needed to understand the ramifications of outsourcing contracts. A critical element that hosting advisors are now assessing in selecting new providers is the vendors’ implementation of quality initiatives like ISO 9001, IT Service Management or Carnegie Mellon’s e-Sourcing Capability Model.
As a next step, Global 2000 firms should identify their degree of risk exposure to their internal audit committees in order to determine applicability for disclosure in SEC filing as part of Management’s Discussion and Analysis forms in compliance with the Sarbanes Oxley Act.
C&W is due to report its mid-year financial results in November, and it is also expected that they will communicate their future direction and intentions at that time. One can anticipate that the competition will feature attractive incentives and deeper price discounting in order to woo prospective C&W clients.
As an observer, it will be interesting to see if C&W clients will be enticed by price incentives or if there will be a ‘flight to quality’. Time alone will tell.
About the author
Ed Agar is co-founder and Principal of PrimeSourcing Advisors, an IT advisory firm. For more information, visit primesourcingadvisors.com.