How bankruptcies can affect your business

Nortel is thinking about bankruptcy . The Wall Street Journal reported last week that the big Canadian telecommunications equipment maker has hired outside lawyers to help in case the company decides to seek bankruptcy court protection from creditors. The company said no bankruptcy filing is imminent.

Still, Nortel is thinking about bankruptcy. We should too.

After all, Nortel won’t be the last IT vendor facing the B-word in this economic downturn. In the last recession in 2001, bankruptcy took out venerable disaster recovery vendor Comdisco, along with youngsters like Exodus Communications and MarchFirst .

This time around, with so much of the financial industry hurting and automakers up against it too, technology vendors may take a bigger hit.

What then? Bankrupt is a scary word. We don’t want our hardware and software suppliers to go away. We don’t want our support contracts to be worthless. And we really don’t want our software-as-a-service vendors to fold without warning.

Fortunately, bankruptcy doesn’t always mean that a vendor will disappear or even falter. For example, high-end server maker SGI — the company formerly known as Silicon Graphics — filed for bankruptcy in 2006, emerged less than six months later, and never stopped doing business or making its products.

And just because a company is looking at bankruptcy, that doesn’t mean that will happen. Vonage , the consumer voice-over-IP vendor, told the Securities and Exchange Commission in 2007 that if the company lost a series of patent infringement lawsuits, it could go bankrupt. Vonage lost or settled all of those suits. But so far, there’s been no Vonage bankruptcy.

What talk of bankruptcy does mean for corporate IT is that a vendor is at risk — so if the talk is about one of your vendors, you need information, contingency plans and an exit strategy.

You need to pay close attention to news reports about that vendor. Is it an acquisition target for another of your suppliers? Which products and services do analysts say are the most likely to be dumped to cut costs? Are they the ones you use or are considering?

Then you need planning. What happens if the products you use are end-of-lifed early? What if support prices are jacked up? What if product lines are slimmed down? What if you simply have to find another vendor?

You can come up with those answers long before things actually collapse. And you should. A bankruptcy may be an unavoidable crisis for a vendor, but there’s no reason it should be any kind of crisis for you — and there’s every reason to avoid that situation.

So if Nortel is thinking about bankruptcy and it’s a vendor you depend on, now is a good time to think hard about what could happen.

Here’s one other thing to think about: During the 2001 recession, Peregrine Systems didn’t file for bankruptcy protection. Why should it? The company reported quarter after quarter of big profits.

But six months after the recession ended, financial irregularities turned up. Peregrine sued its accounting firm, fired its CEO and CFO, and filed for bankruptcy protection in late 2002. The remnants of the company were eventually sold to BMC and Hewlett-Packard.

In 2004, the fired executives were indicted for securities fraud for faking those rosy balance sheets. They eventually pleaded guilty and will be sentenced this month. See? Thinking about bankruptcy isn’t so bad after all. There are much worse ways to go.

Frank Hayes is Computerworld ‘s senior news columnist. Contact him at [email protected]

Computerworld (US)

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