Turbulent Times for IT Decision-Makers

by Tabrez Khan    Jan 19, 2009

These are turbulent times for IT companies and by way of association for their customers, who outsource IT functions to them and have them as long-term strategic vendors. Nortel Networks’ declaration of bankruptcy might have come as another jolt to its customers. Earlier, the unfolding of the Satyam saga made some of its overseas customers terminate their contracts with Satyam and many others are likely to follow suit if they do not foresee a quick recovery.

But Satyam (SATYAMCOMP) is an Indian company with most of its clients overseas. Nortel on the other hand has a wide base of clients in India across verticals such as financial services, education, healthcare, transportation, hospitality and IT itself. It also has deals with Bharti Airtel (BHARTIARTL), Reliance (RELIANCE), Gail India (GAIL), Mumbai International Airport and the Chattisgarh state government. So how are these deals likely to be impacted by Nortel’s bankruptcy?

Some projects such as the one with Chattisgarh state government for deployment of a state-wide wide area network connecting all key government departments are critical from a wider perspective. So their smooth implementation is important and any threat to business continuity at Nortel would threaten completion of these projects.

However, Nortel’s filing for bankruptcy should not affect its ability to do work for any of its customers. Chapter 11 bankruptcies under which Nortel has covered itself is a voluntary step companies take to reduce or eliminate their debt. "Chapter 11" refers to a section of the U.S. Bankruptcy Code.

This means that the company is not out of business, for which a separate Chapter 7 filing applies. In Chapter 11, companies continue to operate. Their stocks and bonds continue to trade. But bondholders stop receiving interest and principal payments, stockholders stop receiving dividends and debt payments are suspended to give companies time to develop a reorganization plan.

Also the company reportedly has $2.4 billion worth cash to continue its operations, so it may not have a material impact on its current operations.

In fact, the bankruptcy filing may turn out to be a blessing in disguise for Nortel, long troubled by financial concerns as now it will have no obligations to pay its debts in the short-term.

That may be so, but IT decision-makers may certainly be edgy in these difficult times. They will be called upon to do more due diligence now from a business continuity viewpoint. This will be key to ensure that IT vendors do not suddenly disappear from the corporate map due to a bankruptcy or corporate governance fiasco.

Also while that is a remote possibility, especially with larger established IT outsourcers and vendors, CIOs would certainly like to avoid the pain caused by such turbulent happenings. However, all said and done, business rationale will reign supreme and the IT vendor that provides a long-term strategic fit and robust ROI will be the favored one.