WorldCom's revelation of financial improprieties last week pushed it to the brink of bankruptcy and forced customers to decide what to do about their mission-critical data services.
In a statement on June 24, WorldCom acknowledged that during 2001 and the first quarter of 2002, it improperly accounted for $US3.8 billion in operating expenses as capital expenses. In the wake of that admission, the Securities and Exchange Commission slapped WorldCom with a fraud suit, and Nasdaq halted trading of the company's stock.
Analyst firms were quick to urge clients to terminate WorldCom service if possible or to seek backup service. Yet some customers vowed to stick with the vendor.
"Our first reaction is that the sky is not falling," says Dayne Sampson, IT vice president at web search engine company Ask Jeeves in Emeryville, California.
Ask Jeeves began using a WorldCom collocation facility for its website last year. Sampson says Ask Jeeves has been happy with the service so far and has received assurances that its service-level agreements will continue to be met.
"If the service levels fall off, we could terminate the contract and move elsewhere, but it is our last desire to do that," Sampson says.
He adds that Ask Jeeves went through a similar situation last year with web hosting vendor Exodus Communications and has agreements in place with WorldCom competitors that would keep its service in place without interruption if WorldCom is unable to continue operating.
"We're prepared to react to it if we have to," Sampson says.
Brownlee Thomas, an analyst at Giga Information Group, in Cambridge, Massachusetts, recommended that WorldCom customers who haven't diversified their telecommunications and data networking coverage do so immediately.
Along with the bad financial news, WorldCom has announced 17,000 layoffs, and Thomas warned that many more could follow. "I have clients who don't even want to send them an RFP (request for proposal)," she says.
"Once you've told a lie like that, how do you ever get that confidence back?" asks Don Carros, an analyst at Meta Group in Stamford, Connecticut. "They've got no way to operate in a normal fashion now."
Still, two of WorldCom's biggest customers say they don't expect to defect.
Mike Demeo, a spokesman for Nasdaq Stock Market, a WorldCom networking customer since 1991, says the New York-based stock exchange has no plans to change any of its WorldCom services, even as it prepares to introduce its new electronic-trading floor later this month.
He says Nasdaq does have contingency plans in place in case WorldCom experiences a catastrophic failure. He adds that Nasdaq also built some assurances into its contract with WorldCom. "They can't take people off our service without our approval," Demeo says.
The Federal Aviation Administration, meanwhile, runs its air traffic control system over a WorldCom backbone.
Fraser Jones, a spokesman for the FAA, says WorldCom has given the government assurances that its service won't be affected by the job cuts.
Yet the FAA will make a larger statement about WorldCom's service on July 25, when it awards its new data networking contract. WorldCom is vying with Harris, Raytheon and Lockheed Martin for the contract.
In a webcast statement, WorldCom CEO John Sidgmore said the company would be committed to setting "the highest ethical standards" as it moves forward. Meanwhile, WorldCom sacked its chief financial officer and dropped Chicago-based Andersen as its independent auditor.
Sidgmore also plugged the company's data backbone, which Meta's Carros says he expects will be the centre of the reconfigured company. "That network won't disappear," Carros says. "The government probably won't let it disappear."
Despite his confidence that WorldCom's physical network will survive, Carros says he expects the company to file for bankruptcy protection within a month.
Although Thomas says customers need to seek alternate carriers, she notes the telecommunications industry has been in a deep recession and that competitors such as AT&T and Sprint have also been hit hard.
"Those companies aren't going to hire people to take care of you," she says. "They'll try and do more with less."
AT&T declined to comment, and Sprint failed to return calls seeking comment.